ENTREP12_Q2_M8_COMPUTATION OF GROSS PROFITS PDF

Quarter 2 — Module 8 Computation of Gross Profit CO_Q2_Entrepreneurship SHS Module 8 Entrepreneurship – Grade 12 Alternative Delivery Mode Quarter 2 - Module 8 Second Edition, 2021 Republic Act 8293, section 176 states that: “No copyright shall subsist in any work of the Go...

Quarter 2 — Module 8 Computation of Gross Profit CO_Q2_Entrepreneurship SHS Module 8 Entrepreneurship – Grade 12 Alternative Delivery Mode Quarter 2 - Module 8 Second Edition, 2021 Republic Act 8293, section 176 states that: “No copyright shall subsist in any work of the Government of the Philippines. However, prior approval of the government agency or office wherein the work is created shall be necessary for exploitation of such work for profit. Such agency or office may, among other things, impose as a condition, payment of royalty.” Borrowed materials included in this module are owned by the respective copyright holders. Effort has been exerted to locate and seek permission to use these materials from the respective copyright owners. The publisher and author do not represent nor claim ownership over them. Development Team of the Module Writers: Joel Y. Yacas Janice B. Dominguez Naneth M. Valdehuesa Ronee D. Quicho Mary Cris A. Maquilan Marylinda T. Puzon Charity E. Parel Denver E. Neri Lorena Fe S. Anub Ethel Lalaine B. Morales Evaluators: Cherryl F. Descallar Jessie Cris N. Abrogueña Eddy Lou T. Hamak Milger A. Baang Sherriemae V. Reazol Illustrator & Layout Artist: PSSg Edzel M. Dominguez, Ivy O. Niñeza Management Team: Arturo B. Bayocot, PhD, CESO III, Regional Director Victor G. De Gracia Jr., PhD, CESO V, ARD Mala Epra B. Magnaong, Chief CLMD Bienvenido U. Tagolimot, Jr., PhD, Reg EPS ADM Elson C. Jamero, EPS-Designate-TLE Marie Emerald A. Cabigas, PhD, Reg EPS, LRMS Erlinda G. Dael, CESE, PhD, CID Chief Celieto B. Magsayo, Div LR Supervisor Andrian S. Tecson, Div ADM Coordinator Printed in the Philippines by: Department of Education – Regional Office 10 Office Address: Zone 1, Upper Balulang Cagayan de Oro City 9000 Telefax: (088) 880-7071, (088) 880-7072 E-mail Address: [email protected] Entrepreneurship Quarter 2 – Module 8 Computation of Gross Profit 3 CO_Q2_Entrepreneurship SHS Module 8  Introductory Message For the Learner Have you ever dreamed of becoming the next multi-millionaire? If you’re thinking that winning the lottery is the only way to become one, well, think again. It is not chance that gives you millions, instead being a millionaire is a result of hard work and determination. Starting your own business is a good beginning towards fulfilling your dreams. Entrepreneurship is the way! You may often hear the word entrepreneur and entrepreneurship. But what do these terms mean? You may refer to an entrepreneur as the person managing the business and entrepreneurship as the business venture. Some may say there is no difference. So, what does this module provide you towards reaching your dreams? 1. It outlines the concepts and basic principles, and processes of developing a business plan. 2. It helps you understand the environment and market in your locality as a factor in developing a business concept. 3. It allows you to experience starting and operating your own business. Substantial knowledge of entrepreneurial principles and processes is important as this increases the chances of making your business successful. In this module, you are guided with a set of learning parts that will help you understand the underlying principles of entrepreneurship. 1. What I Need to Do – the part used to introduce the learning objectives in this module. 2. What I Know – this is an assessment as to your level of knowledge to the subject matter at hand, meant specifically to gauge previous knowledge. 3. What’s In – the part used to connect your previous learning with the new lesson. 4. What’s New – the part used to introduce new lesson through a story, an activity, a poem, song, situation or activity. 5. What is It – the part that will help you discover and understand entrepreneurial concepts. 6. What’s More – the part that will help enrich your learnings of entrepreneurial concepts. 7. What I Have Learned – the part that will help you process what you have learned In the lesson. 8. What I Can Do – the part that allows you to apply what you have learned into real life situations. 9. Assessment – the part that evaluates your level of mastery in achieving the learning objectives. 10. Additional Activities – the part that enhances your learning and improves your mastery of the lesson. 4 CO_Q2_Entrepreneurship SHS Module 8  What I Need to Know As we all know, 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 the 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 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 Lesson 2 – Create the company’s five (5) year projected financial statementsCS_EP11/12ENTREP-0h-j-17 To be able to successfully complete this module, previous knowledge in adding and multiplying numbers will best help. 1 CO_Q2_Entrepreneurship SHS Module 8  After carefully studying the contents of this module, you should be able to:  Identify essential components in computing revenues and costs;  Differentiate between gross profit, operating profit and net profit;  Interpret financial ratios such as the gross profit rate, operating profit margin and net profit margin;  Compute actual revenues;  Compute actual costs;  Compute gross profit, operating profit and net profit;  Compute the gross profit rate, operating profit margin and net profit margin;  Create profit schedules and reports;  Appreciate the importance of keeping track with the performance of one’s business through the correct and honest computation and reporting of business profit; and  Appreciate the importance of the correct computation and interpretation of financial ratios gross profit rate, operating profit margin and net profit margin. What I Know Let us see what you already know about forecasting revenues and costs. Answer the questions below. Write True if the statement is correct and write False if you think the statement 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. 2 CO_Q2_Entrepreneurship SHS Module 8  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 the 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 the 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. 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 a normal situation, it is favorable for the business to have high inventory. 15. Preparation and presentation of the financial statements of the entity is the primary responsibility of an accountant. 3 CO_Q2_Entrepreneurship SHS Module 8 Lesson Computation of Gross Profit 1 What’s In Let’s review what is revenue of the business. This is an important tool and material 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 get ready for any incoming event. Forecasting is the tool used in planning that aims to support management or a business owner in his desire to adjust and cope 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. What’s New Activity 1 Read and understand the given problem. Rodrigo is engaged in a buy – and – sell business of perfumes. He bought 10 boxes of perfumes. Each box costs P12,000.00 and contains a dozen of perfume bottles. He is planning to sell one perfume bottle at P1,500. What is his expected profit on the 10 boxes of perfumes? 4 CO_Q2_Entrepreneurship SHS Module 8  The ultimate goal of any business whether a retail or wholesale is to earn a profit. Getting the difference between the amount of money earned from the selling 10 boxes containing a dozen of perfume bottles and the cost of those 10 boxes gives the profit. In the example that I gave, answer the following questions: 1. How much profit does Rodrigo earn? 2. Is it good to engage in a business like Rodrigo’s? Yes or No? 3. What do you think of Rodrigo’s business? Is it good for a beginner? What Is It Computing the Gross Profit The profitability ratios are a group of financial statements 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 is as follows: Net Sales P 734, 000.00 Less: Cost of Sales 577, 000.00 Gross Profit P 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 the total outlay required in producing it. 5 CO_Q2_Entrepreneurship SHS Module 8 The gross profit margin is computed as follows: Gross Profit Gross Profit Rate = Net Sales 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 2017 is computed as follows: 46,900.00 gross profit rate = 734,000.00 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 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 is 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, 6 CO_Q2_Entrepreneurship SHS Module 8 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 states 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 Operating Profit Margin Rate = Net Sales By applying Operating Profit Margin Rate = 67,000.00 734,000.00 The operating profit margin of the business measures the percentage of profit available after deducting the cost of sales and operating expenses of the business. A higher operating profit margin is favorable to the business. Net Profit Margin Rate Operating Profit Margin xxxxxxx xxxxxxx Add: Interest Income Total Less: Interest Expense xxxxxx Income Tax xxxxxx xxxxxx Net Profit margin xxxxxx The income statement is the net profit margin and 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 7 CO_Q2_Entrepreneurship SHS Module 8  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 46,900.00 Net profit margin rate = 734,000.00 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. Analyzing the Liquidity Status of the Business Liquidity Ratios Current Ratio = Current assets / Current Liabilities Quick Ratio = (Current Assets – Inventories) / Current Liabilities Current liabilities= (Cash and Equivalents + Marketable Securities + Accounts Receivable) 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. 8 CO_Q2_Entrepreneurship SHS Module 8 The formula to compute ROI is as follows: The average total asset is calculated by dividing the sum of the total assets at the beginning and end of the period. Table 1 Projected Five Year Balance Sheet Fit Mo'to Ready to Wear Online Selling Business Year 1 Year 2 Year 3 Year 4 Year 5 ASSET Cash 337,398.56 686,417.05 1,052,886.47 1,437,679.36 1,841,711.89 Total Assets 337,398.56 686,417.05 1,052,886.47 1,437,679.36 1,841,711.89 Liability - - - - - Owner’s equity 337,398.56 686,417.05 1,052,886.47 1,437,679.36 1,841,711.89 Total Liabilities and Owner's Equity 337,398.56 686,417.05 1,052,886.47 1,437,679.36 1,841,711.89 Table 1 Projected Five Year Income Statement Fit Mo'to Ready to Wear Online Selling Business Year 1 Year 2 Year 3 Year 4 Year 5 Revenue 1,545,673.95 1,622,957.64 1,704,105.53 1,789,310.80 1,878,776.34 Cost 1,213,275.38 1,273,939.15 1,337,636.11 1,404,517.91 1,474,743.81 Gross Profit Before tax 332,398.56 349,018.49 366,469.42 384,792.89 404,032.53 9 CO_Q2_Entrepreneurship SHS Module 8  Yearly increase in revenue is assumed at 5% Yearly increase in cost is assumed at 5% 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 by an entrepreneur through 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 importance in entrepreneurship is that the business activities are performed correctly. What’s More 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 a dozen at a price of P18,000.00 per unit. However, a new model of smartphones 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: a. Gross profit rate b. Operating profit margin rate c. Net profit margin rate d. Return on Investment 10 CO_Q2_Entrepreneurship SHS Module 8 Now ask yourself the following questions: 1. Is creativity present in the operation of ordinary small businesses along the streets and highways and in your neighborhood? Why do you say so? 2. Do you consider the business practices of small business owners a form of entrepreneurship? 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. It is computed as follows: Net Sales xxxxxx Less: Cost of Sales xxxxxx Gross Profit xxxxxx 11 CO_Q2_Entrepreneurship SHS Module 8  By using the formula, the gross profit of XYZ Co., in the year 2017 is computed as follows: Net Sales P734,000.00 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 and 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 o What I Can Do Conduct an interview of at least three (3) successful business people in your locality, use the following questions as your guidelines: 1. What motivated him to start a business? 2. What is the nature of his/her business? 12 CO_Q2_Entrepreneurship SHS Module 8  3. How much capital was involved? 4. How many years has the business been existing? 5. Did he/she consider the population of the community? 6. How much gross profit did he/she earn for the first year of operation? Assessment How much did you understand the lessons in this module? Answer the following questions. Write True if the statement is correct and write False if you think the statement 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. 13 CO_Q2_Entrepreneurship SHS Module 8  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 the 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 the 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. 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 a normal situation, it is favorable for the business to have high inventory. 15. Preparation and presentation of the financial statements of the entity is the primary responsibility of an accountant. 14 CO_Q2_Entrepreneurship SHS Module 8  Additional Activities After learning how to compute the gross profit, try solving the given problems below: 1. A watch store owner decided to offer 20% discount for a particular brand of watch that sells at P35,000.00. By doing so, his average sales increased from 5 watches to 12 watches a day. If he bought one watch at a price of P22,000.00 from the supplier, by how much was his daily profit increased or decreased by offering such discount on the watch? 2. Michelle went to Baguio and bought 20 jars of strawberry jam for P3,500.00 with 15% discount. When she got back to Manila, she sold 10 of the jars for a total of P1,800.00 and the rest as P185.00 each. How much profit did Michelle gain? 15 CO_Q2_Entrepreneurship SHS Module 8 Answer Key 16 CO_Q2_Entrepreneurship SHS Module 8  References BOOKS Aduana, Nick L. Entrepreneurship in the Philippine Setting for Senior High School. Quezon City. C & E Publishing, Inc. 2016. Aduana, Nick L., Entrepreneurship in Philippine Setting for Senior High School, 2017, C&E publishing, Inc.p.46-51 Aduana, Nick L. "Chapter 5/Lesson 3 The Marketing Mix." In Entrepreneurship In Philippine Setting For Senior High School, 184-199. Quezon City, Philippines: C&E Publishing, 2016. Banastao,C.,& Frias, S.(2008) Entrepreneurship.Quezon City Philippines: C & E Publishing, Inc. Batisan,Ronaldo S., Entrepreneurship: Diwa Senior High School Series, Diwa Learning Systems Inc., p. 16-20 Batisan, Ronaldo S. Entrepreneurship Module, Diwa Senior Highschool Series, Diwa Learning System Inc. Legaspi Village, Makati City Philippines, copyright 2016. De Guzman, Angeles A., Entrepreneurship for Senior High School Applied Subject ABM Strand,Lorimar Publishing,p.1-5 De Guzman, Angeles A., Entrepreneurship for Senior High School Applied Subject ABM Strand,Lorimar Publishing,p.25-26 Habaradas, Raymund B., and Tereso S. Tullao,Jr., Pathways to Entrepreneurship,2016,Phoenics publishing house,p.17-28 Lopez, Rafael Jr. Basic Accounting for Non-Accountants. 2015 Lopez, Rafael Jr. Fundamentals of Accounting. 2016 Lopez, Jr. Rafael M. Fundamentals of Accounting, 2014-2015 Edition Morato Jr., Eduardo A., Entrepreneurship, 1st ed., Manila, Philippines: REX Books Store,p.13 Morato, Eduardo A. Entrepreneurship. Manila. Rex Bookstore, Inc. 2016. Rabo, Tugas, and Salendrez, H.E. Fundamentals of Accountancy, Business and Management. Vibal Group Inc. 2016 Teaching Guide for Senior High School, Fundamentals of Accountancy, Business, & Management 1, CHED in collaboration with PNU 17 CO_Q2_Entrepreneurship SHS Module 8 Teaching Guide for Senior High School, Fundamentals of Accountancy, Business, & Management 2, CHED in collaboration with PNU Teaching Guide for Senior High School, Business Finance, CHED in collaboration with PNU ELECTRONIC RESOURCES https://www.tutorialspoint.com/entrepreneurship_development/entrepreneurship_devel opment Business Dictionary. http://www.businessdictionary.com/defination/market-size.html “Forecasting” Businessdictionary, Accessed December 10, 2018, http://www.businessdictionary.com/definition/forecasting.html “How to Make Revenue Forecasts” Smarta, Accessed December 10, 2018, http://www.smarta.com/advice/business-planning/business-plans/how-to-make- revenue-forecasts/ Katie Jensen, “Factors Considered in Financial Forecasting.” Chron. Hearst Newspapers. Acessed December 10, 2018. https://smallbusiness.chron.com/factors- considered-financial-forecasting-80716.html https://www.slcbookkeeping.com/blog/bid/207078/Bookkeeping-Tasks-for-Every-Part- of-the-year https://www.thebalancesmb.com/steps-to-increase-small-business-profits-1200720 https://www.wikihow.com/Calculate-Profit 18 CO_Q2_Entrepreneurship SHS Module 8 For inquiries or feedback, please write or call: Department of Education - Bureau of Learning Resources (DepEd-BLR) Ground Floor, Bonifacio Bldg., DepEd Complex Meralco Avenue, Pasig City, Philippines 1600 Telefax: (632) 8634-1072; 8634-1054; 8631-4985 Email Address: [email protected] * [email protected]