The following balances were extracted from the books of Adama Ltd on 31st August 2007

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The following balances were extracted from the books of Onuoha, a trader on 31st December 2005

Audit fee 12000
General Expenses 30000
Purchases 70000
Commission paid 3000
Stock (1-01-2005) 10000
Stock (31-12-2005) 15000
Sales 120000

The net profit equals

₦
Sales 200000
Drawings 10000
Land and building 70000
Furniture 10000
Debtors 50000
Creditors 35000
Capital 85000
Bank 10000
General expenses 10000
Stock ( 31-08-2007) 10000
Purchases 140000
Stock (1-09- 2006) 20000

Percentage of net profit to sale is

  1. 10%
  2. 20% ✓
  3. 30%
  4. 40%

Explanation

To calculate the net profit percentage, we need to first find the net profit and then express it as a percentage of sales. This ratio shows how much profit the business makes for every naira of sales.

Step 1 – Calculate Cost of Goods Sold (COGS): Opening Stock (₦20,000) + Purchases (₦140,000) – Closing Stock (₦10,000) = ₦150,000.

Step 2 – Calculate Gross Profit: Sales (₦200,000) – COGS (₦150,000) = ₦50,000.

Step 3 – Calculate Net Profit: Gross Profit (₦50,000) – General Expenses (₦10,000) = ₦40,000.

Step 4 – Calculate Net Profit Percentage: (Net Profit ÷ Sales) × 100 = (₦40,000 ÷ ₦200,000) × 100 = 20%. This means for every ₦100 in sales, the business earns ₦20 in net profit after all expenses.

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