Gross Profit/Loss Question and Solution:

by Sajjad Khan

Q: The following information is provided to you (note that Rs = Rupees, official currency of Pakistan, India and Sri Lanka. O/B = Opening Balance):

Sales Rs.60000
Cost of sales Rs.50000
O/B Stock Rs.10000
Purchases Rs.40000
Wages Rs.20000 and
Office rent Rs.10000.

Calculate the gross profit/loss.

A: This exercise may seem more complicated than it actually is, as very often in a question like this you end up having to use the cost of sales formula (cost of sales = opening inventory + purchases - closing inventory) and do a calculation with it. However, in this question they have already provided the cost of sales or cost of goods sold (same thing). So one does not need the opening balance of inventory or the purchases during the year. And of course the other expenses (wages and office rent) are also not needed as they do not form part of gross profit, they fall under the net profit calculation later in the income statement.

The solution is actually very simple:

Gross profit = Sales - Cost of Sales
= 60000 - 50000 = 10000

See the lesson on sales, cost of goods sold and gross profit for more information on this topic and to see the format of the income statement and where the different expenses fit in there.

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