Module Computation of Gross Profit

What I Need to Know

As we all know that profit is a financial gain from a transaction or from a period of
investment or business activity, usually calculated as income in excess of costs or as
the final value of an asset in excess of its initial value.

It is a total revenue minus total expenses, profit is the amount of money a

business "makes" during a given accounting period. The more profit you make, the
better, as profit can be re-invested into the business or retained by the business owners.
Being able to accurately determine your business's profit is an essential part of being
able to judge its financial health. It can also help you decide how to price your goods and
services, how to pay your employees, and more.

To make your business gain more profit, begin by adding up all of the money
your business has made in a set period of time (either, quarterly, yearly, monthly, etc.
Other sources, like products sold, services rendered, membership payments, or, in the
case of government agencies, taxes, fees, the sales of resource rights, and so on.

Note that you will need to subtract any amount of cash refunded to customers for
returns or disputes in order to find an accurate figure for your total income.

It's easier to understand the process of calculating a business's profit by following

along with an example.

Let's say that we own a small publishing business. In the last month, we sold
P20,000 worth of books to retailers in the area. However, we also sold the rights to one
of our intellectual properties for P7,000 and received P3,000 from book retailers for

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official promotional materials. If these represent all of our revenue sources, we can say
that our total income is P20,000 + P7,000 + P3,000 = P30,000.

This module is divided into two lessons:

Lesson 1 – Compute for profits CS_EP11/12ENTREP-0h-j-16

Create the company’s five (5) year projected financial statements
-CS_EP11/12ENTREP-0h-j-17

To be able to successfully complete this module, previous knowledge in adding

& multiplying numbers will best help.
After carefully studying the contents of this module, you should be able to:
• compute for profits
• define profitability, liquidity & solvency
• identify commonly used profitability ratios.

What’s In

Let’s review of what is revenue of the business. This is an important

tool and materials needed in the operation of the business. It is said that revenue is
the result when sales exceed the cost to produce or manufacture goods/merchandise
as well as costs incurred in selling.

Forecast is advance information that could help us prepare and ready for any
incoming event. Forecasting is the tool used in planning that aims to support
management or a business owner in its desire to adjust and cope up with uncertainties
of the future. If anyone of us can predict that we can be rich so it means all of us will
be rich. This fantasy is played out every day in boardrooms across the globe with the
practice of business forecasting.

It is important to have a good organization in the business to easily grow and

expand in the future.

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 What Is It

Compute the Gross Profit

The profitability ratios are a group of financial statement that primarily
determine the profitability of the business operation.
The gross profit rate on a product is computed as:
Net Sales xxxxxxx
Less: Cost of sales xxxxxxx
Gross profit xxxxxxx

By using the formula, the gross of XYZ Trading in the year 2017
Net Sales P 734, 000.00
Less: Cost of Sales 577, 000.00
Gross Profit 157, 000.00

Profit is the gross income. The amount of gross profit provides information to
the entrepreneur about revenue earned from sales.

The term cost refers to the purchase price of the product including of the
product including the total outlay required in producing it.
The gross profit margin is computed as follows:

The gross profit rate measures the percentage of gross profit to sales, indicating
the profit that the business realizes from the sale of the product.

The gross profit rate of XYZ Trading for the year computed as follows:

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 The gross profit rate may signal to the entrepreneur that the amount of margin
on sales is 21.39%. This rate will be used to determine whether the amount of gross
profit can cover the operating of the business. Since the gross profit rate of XYZ
Trading is 21.39%, the cost ratio to sales will be 78.61%. This information will help the
entrepreneur in assessing whether the cost is too high or too low. Any product with a
very high cost will not become competitive in the market.

The gross profit rate will also help the entrepreneur set the selling price.

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.

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 Operating Profit Margin
Operating profit margin rate =
Net Sales
By applying

Operating profit margin rate =

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

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
Net profit margin rate =
Net Sales
By applying the formula, the profit margin of XYZ

Net profit margin rate =

Net profit 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.

Analyze the Liquidity Status of the Business

Liquidity Ratios
Current ratio = Current assets / Current liabilities

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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

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 must perform the entrepreneurial activities correctly regardless of

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whether they are undertaken easily or not. The important in entrepreneurship is that
the business activities are performed correctly.

What I Have Learned

The profitability and ratios are a group financial statement ratios that primarily
determine the profitability of the business operation. They provide information on the
efficiency of resource utilization.

The gross profit represents the difference between net sales and cost of sales
of the entrepreneurial venture during a given period.
By using the formula, the gross profit of XYZ Co., in the year 2017 is computed as
follows:

Net Sales P 734,000.00

Less: Cost of Sales 577,000.00
Gross profit P 157,000.00

Profit is determined by:

• the money you get from sales
• the cost of stock – if you're selling a product
• all the expenses you incurred
Income earned by the business are sales & gross profit. Commissions,
discounts, fixed expense are business expenses.

How to Increase your Sales

❖ Improve profit by looking at the money you earn from sales, and increase:
o The number of customers
o The volume of goods or services existing customers to buy
o The sales price

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 Assessment

How did you understand the lessons that you have studied in this module? Answer
the following questions.

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.
_________6. Profit is the money received from customer in exchange of
products given to customer.
_________7. The gross profit rate of the entrepreneurial venture is computed by
dividing the cost of goods sold by net sales.
_________8. The gross profit rate provides information on the cost ratio of
business.
_________9. One of the objectives in evaluating the gross profit rate of the
business is to determine whether the amount of the gross profit is sufficient to cover
the operating expenses.
_________10. The operating profit margin rate indicates information on the
percentage of operating expenses to net sales.
_________11. The government is not interested in financial statements since it is
not a party to any of the transactions of the business.
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_________12. The net profit margin rate presents the general perspective of the
operating performance of the business.
_________13. The amount of income per peso investment can be determined by
computing the net profit margin rate.
_________14. In normal situation, it is favorable for the business to have high
inventory
_________15. Preparation & presentation of the financial statements of the entity is
the primary responsibility of an accountant.

Module Business Implementation

What’s In

Before you proceed, let us first recall our previous lesson.

Profit is the amount you gain after selling your product. In computing your profit, you
just simply follow this formula:
Sales - Cost of Goods Sold = Gross Profit
The gross profit represents the difference between net sales and cost of sales.
Variable costs are those things that change based on the amount of product being
made and are incurred as a direct result of producing the product.

Variable costs include:

1. Materials used
2. Direct labor
3. Packaging
4. Freight
5. Plant supervisor salaries

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 6. Utilities for a plant or a warehouse
7. Depreciation expense on production equipment
8. Machinery

Fixed costs generally are more static in nature. They include:

1. Office expenses such as supplies, utilities, a telephone for the office, etc.
2. Salaries and wages of office staff, salespeople, officers and owners
3. Payroll taxes and employee benefits
4. Advertising, promotional and other sales expenses
5. Insurance
6. Auto expenses for salespeople
7. Professional fees
8. Rent

Guidelines for successful business plan implementation:

1. Objectives- the entrepreneur should have a clear idea on what is his purpose of
putting up his enterprise.
2. Tasks- this means that the entrepreneur must know what the tasks are he has to
perform in order that his objectives will be realized.
3. Time allocation- This means that the entrepreneur should have a timetable or a
schedule to follow every task, so that it will be accomplish on time and
realize his objective.
4. Progress- This means that the entrepreneur should monitor the development of
the tasks and the accomplishment of the objective.

In Operating a business, the entrepreneur should first consult professional for advice,
like accountants or consultants from small enterprises. In your case, you can consult
your teacher in entrepreneurship or anyone you think that could help you.
The following are the basic requirements to start a business in the Philippines:
• Securities and Exchange Commission (SEC) Registration - for partnership or
Corporation

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 • Department of Trade and Industry (DTI) Registration - for your business
tradename
• Mayor’s Business Permit - for getting the license to operate in the city or
municipality and payment of your local business taxes

• Bureau of Internal Revenue (BIR) Registration - for getting TIN, official receipts
and invoices, registering your books of accounts and paying your national
Internal revenue taxes
• SSS, PhilHealth, and Pag-Ibig Fund registration - for registering yourself or
company as an employer and for remitting your employees’ contribution together
with your employer’s share

Other steps to follow before operating a Business are as follows:

1. Set up an accounting system or hire an accountant. Knowing how the

business is doing financially is important for planning and survival.
2. Advertise the business. No one will buy the products or services if customers
do not know that the company exists. You can make use of the social media.
3. Secure insurance for the business. Liability insurance protects the business in
the event of litigation. Consider life and disability insurance, health insurance and
fire insurance when you are leasing an office or storefront.

Keeping Business Records

Good record keeping can help protect the business, measure the performance
and maximize profit.
Records are the source documents, both physical and electronic, that specify
transaction dates and amounts, legal agreements and private customer and business
details.
Developing system to log, store and dispose of records can benefit the business.
A systematic recording allows you to;

A. Plan and work more efficiently

B. Meet legal and tax requirements
C. Measure profit and performance
D. Protect your rights, and

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 E. Manage potential risks

Implementing the Business Plan is not that easy. It needs to be registered to

make it legal and record keeping gives a lot of benefits to the enterprise.

Assessment

Now that you are finished accomplishing the module, let us check what you have
learned. Answer the questions given below by encircling the letter of the correct answer.
1. Which office will you go to register your single owned business?
A. SEC C. BIR
B. DTI D. Mayor’s Office
2. Which office do you visit to register partnership or corporation business?
A. SEC C. BIR
B. DTI D. Mayor’s Office
3. To secure Tax Identification Number (TIN), which office will you go?
A. SEC C. BIR
B. DTI D. Mayor’s Office
4. SSS, Philhealth and Pag-ibig fund contributions is made by _________.
A. Employees only C. Both Employees and Employers
B. Employers only D. None of the choices
5. Which of the following is not a step to follow before operating a business?
A. Register your business
B. Set up accounting system
C. Advertise the business using Facebook
D. Selling the product
6. Which of the following is true?
A. Good record keeping is not important to the business owner.
B. Good record keeping is important only to the accountant.
C. Good record keeping gives benefits to the enterprise.
D. Good record keeping gives no importance at all.

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7. Which of the following is NOT a benefit to the enterprise?
A. Plan and work more efficiently.
B. Meet legal and tax requirements.
C. Can check if the business is doing good.
D. It cannot protect the rights of the owner.
8. The objectives of the entrepreneur should be _______________.
A. Specific and clear
B. Specific and long term
C. Short and blurred
D. Long and not specific
9. The tasks before operating the business must be _____________.
A. Specified to be accomplished by the owner alone
B. In detail so that the owner will know what to do
C. Kept by the owner for future reference
D. None of the choices
10. The tasks to be accomplished before operating the business should have:
A. Design C. Time allotment
B. Decoration D. Measurement
11. Which of the statements is true?
A. Before starting a business, the entrepreneur may not consult a
professional for advice.
B. Before starting a business, the entrepreneur should consult a professional
for advice.
C. Before starting a business, the entrepreneur must start selling when there
are available buyers.
D. None of the choices
12. To register your Business Trade name is done in the office of ______?
A. SEC B. Mayor’s Office C. DTI D. Philhealth Office
13. The sources of documents are called ____?
A. Income statement
B. Balance sheet
C. Record
D. Record Keeping

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14. Which of the following is not a benefit of record keeping?
A. It will not help in managing potential risks.
B. It will measure profit and performance.
C. It will protect the rights of the owner.
D. It will not let you know how much you are earning.
15. Which of the following statements is true?
A. Professional advice is only needed before starting the business.
B. Professional advice is needed all throughout the life of the business.
C. Professional advice is made only by consultants.
D. Professional advice is only a waste of money.

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