Question

Gross Profit Ratio of a company is 25%. State giving reason, which of the following transactions will (a) increase or (b) decrease or (c) not alter the Gross Profit Ratio.
(i) Purchases of Stock-in-Trade ₹50,000.
(ii) Purchases Return ₹15,000.
(iii) Cash Sale of Stock-in-Trade ₹40,000.
(iv) Stock-in-Trade costing ₹20,000 withdrawn for personal use.
(v) Stock-in-Trade costing ₹15,000 distributed as free sample.

Answer 1

Transactions	Effect on Gross Profit Ratio	Reason
(i) Purchase of Stock-in-Trade Rs 50,000	No Change	Both purchases and closing inventory will increase by Rs 50,000; therefore, cost of revenue from operations will not be affected. So, Gross Profit Ratio will remain same.
(ii) Purchase Return Rs 15,000	No Change	Both purchases and closing inventory will decrease by Rs 15,000; therefore, cost of revenue from operations will not be affected. So, Gross Profit Ratio will remain same.
(iii) Cash Sale of Stock-in-Trade Rs 40,000	No Change	Revenue from operations will increase by Rs 40,000 and Gross Profit will increase by 10,000 (40,000 x 25%), Therefore, both revenue from operations and gross profit will increase by 25%. So, Gross Profit Ratio will remain same.
(iv) Stock-in-trade costing Rs 20,000 withdrawn for personal use	No Change	Both purchases and closing inventory will decrease by Rs 20,000; therefore, cost of revenue from operations will not be affected. So, Gross Profit Ratio will remain same.
(v) Stock-in-Trade costing Rs 15,000 distributed as free sample	No Change	Both purchases and closing inventory will decrease by Rs 15,000; therefore, cost of revenue from operations will not be affected. So, Gross Profit Ratio will remain same.