Question

Teeby Ltd. is a wholesaler for hair care products. Purchases and sales are entirely on credit. You have ascertained the following information for the trading year just ended:

• The amounts due from customers at the start and end of the year was €100,000 and €84,000 respectively
• Receipts from customers during the year amounted to €744,000
• Payments to suppliers during the year totalled €580,000
• The company uses a 30% mark-up to set its sales price

What was the company’s gross profit for the year?

Answer 1

Since we are given that sales are entirely on credit, we can find the sales made during the year by making the accounts receivable account as follows:

Accounts Receivable
Particulars	Debit	Particulars	Credit
Opening Balance	1,00,000	Receipts from customer	7,44,000
Credit Sales (Balancing figure)	7,28,000	Closing Balance	84,000
Total	8,28,000	Total	8,28,000

Hence total sales = $728,000

Now we are given that company uses a 30% mark up to set its sales price.

This means that gross profit = 30% of Cost.

Let Cost be "$X".

Revenue - Cost =  Gross Profit

728,000 - $X = 0.3 $X

Therefore, $X = $560,000

Purchases = $560,000

Hence, Gross profit = 30% * $560,000 = $168,000