TOPIC: COMPUTATION OF GROSS PROFIT

12

ENTREPRENEURSHIP

COMPETENCY: Compute for profits.

Create the company’s five (5) year projected financial statements
CODE: CS_EP11/12ENTREP-0h-j-16, CS_EP11/12ENTREP-0h-j-17
OBJECTIVES:
At the end of the week, you are expected to:
Knowledge: Define profitability, liquidity & solvency;
Skill: Prepare a journal entry of all your business transactions by giving the
compute for profits
Attitude: Identify commonly used profitability ratios.

Quarter 2 Week 4- Feb 1-5, 2021

MONDAY / 10:30 – 12:00 A.M.

Jennette G. Belliot
 Reference

I. Lesson Contents s/
Resource
s

Senior
Compute the Gross Profit High
School,
The profitability ratios are a group of financial statement that primarily determine the profitability Angele
s A. De
of the business operation. The gross profit rate on a product is comput Guzma
n,
Entrepr
Net Sales xxxxxxx eneurs
hip for
Less: Cost of sales xxxxxxx Senior
High
School
Gross profit xxxxxxx Applied
Subject
ABM
Strand,
Lorimar
By using the formula, the gross of XYZ Trading in the year 2017 Publishi
ng,p.1-
5
Net Sales P 734, 000.00 Ronald
o S.
Less: Cost of Sales 577, 000.00 Batisan
,
Entrepr
Gross Profit 157, 000.00 eneurs
hip:
Diwa
Senior
High
Profit is the gross income. The amount of gross profit provides information to the entrepreneur School
Series,
about revenue earned from sales. The term cost refers to the purchase price of the product Diwa
Learnin
including of the product including the total outlay required in producing it. g
System
The gross profit margin is computed as follows: s Inc.,
p. 16-
20
gross profit rate = gross profit Eduard
o A.
Morato
net sales Jr.,
Entrepr
The gross profit rate measures the percentage of gross profit to sales, indicating the profit that eneurs
hip, 1st
the business realizes from the sale of the product. The gross profit rate of XYZ Trading for the ed.,
Manila,
year computed as follows: Philippi
nes:
gross profit rate = 46,900.00 REX
Books
Store,p.
734,000.00 13 Nick

Gross profit rate = 𝟐1. 𝟑9%

L.
Aduana
,
Etrepre
neurshi
The gross profit rate may signal to the entrepreneur that the amount of margin on sales is p in
21.39%. This rate will be used to determine whether the amount of gross profit can cover the Philippi
ne
operating of the business. Since the gross profit rate of XYZ Trading is 21.39%, the cost ratio to Setting
2017,
sales will be 78.61%. This information will help the entrepreneur in assessing whether the cost is C&E
too high or too low. Any product with a very high cost will not become competitive in the market. publishi
ng,
Inc.p.46
The gross profit rate will also help the entrepreneur set the selling price. -51

Operating Profit Margin Rate

The operating the profit margin is the excess of gross profit from operating expenses.
Gross profit xxxxx
Less: Operating Expenses xxxxx
Operating profit margin xxxxx
The operating profit margin is the second level of revenue in the income statement. At this stage,
not only the cost of buying or making the product that has been deducted is included but also the
operating expenses. These are expenses incurred during a particular period only, and are not
expected to provide benefits to any future period. The operating expenses are also period costs.
In case there are no financing charges like interest, expenses, and income tax, the amount of the
operating profit margin is equal to the net income.
Gross profit P 157,000.00
Less: Operating expenses 90,000.00
Operating profit margin P 67,000.00
This information that the business realized an income of P 67,000.00 during the year after
deducting the cost and operating expenses from the sales made.

Operating profit margin rate = Operating Profit Margin

Net Sales
By applying
Operating profit margin rate = 67,000.00
734,000.00
Operating profit margin rate =9.13%

The operating profit margin of the business measures the percentage of profit available after
deducting the cost of sales & operating expenses of the business. A higher operating profit
margin is favorable to the business.

Net Profit Margin Rate

Operating profit margin xxxxxxx
Add: Interest Income xxxxxxx
Total
Less: Interest Expense xxxxxx
Income Tax xxxxxx xxxxxx
Net Profit margin xxxxxx
The Income statement.is the net profit margin & the third level in the revenue. The business is
only given consideration like interest expense and income tax.

Operating profit margin P67,000.00

Less: Income tax 20,000.00
Net profit margin P46,900.00
The income statement of XYZ Trading does not reflect any data on interest expense. Only
income tax has been deducted from the operating profit margin.
Net profit margin rate = Net Profit
Net Sales

By applying the formula, the profit margin of XYZ

Net profit margin rate = 46,900.00

734,000.00
Net profit rate margin rate = 6.39%

XYZ Trading appears to have earned 6.39% of its total sales of P734,000 during the year. This
profits rate must be compared with those of other similar businesses within the industry.

Analyse the Liquidity Status of the Business

Liquidity Ratios
Current ratio = Current assets / Current liabilities
Quick ratio = (Current assets – Inventories) / Current liabilities
= (Cash and equivalents + Marketable securities + Accounts
receivable) / Current liabilities

The quick ratio measures its short-term obligations with its most liquid assets and therefore
excludes inventories from its current assets.

Financial statements are important in a company management as a means of communicating

past successes as well as future expectations. The financial statement records all the operating
results such as sales, expenses and profits or losses.

Return of Investment (ROI)

The Return of investment (ROI) measures the amount of net income per peso invested to the
business.

The formula to compute ROI is as follows

Return of Investment= Net Income
Average Total Asset

The average total assets are by dividing the sum of the total assets at the beginning and end of
 the period.

As a future entrepreneur, one should always remember that nothing is permanent in the field of
entrepreneurship. What is applicable to one entrepreneur may not be applicable to another.
Certain things may happen to one entrepreneur but may not happen to another.

Entrepreneurship should be practiced not as a science but as an art. Creativity should always be
applied to entrepreneur by regularly evaluating the market and the environment and responding
to the changes in them.

The owner of an ordinary small business has the freedom to manage and operate. Ideally,
he/she prefers business activities which are done easily. However, the entrepreneur has to
perform the entrepreneurial activities correctly regardless of whether they are undertaken easily
or not. The important in entrepreneurship is that the business activities are performed correctly.

II. Activities

Compute the Gross Profit. Answer the given problem.

1. Annie bought one dozen smartphones for P200,000.00 with a discount of 5%. She sold half dozen at
a price of P18,000.00 per unit. However, a new model of smartphone became available in the market,
so she sold the remaining half dozen @ P12,000.00 each unit. What was her profit or loss?

Compute the following requirements:

1. Gross profit rate
2. Operating profit margin rate
3. Net profit margin rate
4. Return on Investment
5. Is creativity present in the operation of ordinary small businesses along the streets and highways and
in your neighborhood? Why do you say so?
___________________________________________________________________________________
PERFORMANCE TASK
Conduct an interview of at least three (3) successful business people in your locality, use the following
questions as your guidelines: Write your answers in a separate sheet of paper.
1. What made him motivate to start a business?
2. What is the nature of his business?
Rubrics Points
3. How much capital involved? Authenticity 10
4. How many years of existence? Timeliness 5
Total 15
5. Did you consider the population of the community?
6. How much gross profit did you earn for the first year of operation?
 IV. Answer Key

Activity Answers may vary

POST TEST
Write True if the statement is correct & write False if you think the answer is not correct.
_________1. The gross profit rate of the entrepreneurial venture is computed by dividing the cost of
goods sold by net sales.
_________ 2. The gross profit rate provides information on the cost ratio of the business.
_________3. In evaluating the profitability of the entrepreneurial venture, the evaluation must focus on
the information reflected on the face of the balance sheet.
_________4. The operating profit margin rate indicates information on the percentage of operating
expenses on the net sales.
_________5. Mr. Q is a practicing Doctor of Medicine. During the month of March 2019 he received
Professional Fees amounting to P 1,000,000 and total expenses of P250,000. The net
income of Mr. Q is P 750,000.