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

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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

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

The gross profit is

  1. ₦25,000
  2. ₦35,000
  3. ₦45,000
  4. ₦55,000 ✓

Explanation

Gross profit is calculated by subtracting Cost of Goods Sold (COGS) from Sales. Gross profit shows the profit from trading before deducting operating expenses.

First, calculate COGS: Opening Stock (₦10,000) + Purchases (₦70,000) – Closing Stock (₦15,000) = ₦65,000.

Then calculate Gross Profit: Sales (₦120,000) – COGS (₦65,000) = ₦55,000.

Note that audit fee, general expenses, and commission paid are not included in gross profit calculation. These are operating expenses that are subtracted from gross profit to calculate net profit. Only the trading items (sales, purchases, and stock) are used to calculate gross profit.

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