Question

Which of the following transaction will affect the 'Gross Profit Ratio' of a company:

(i) Revenue from operations Rs 1,00,000
(ii) Purchased goods worth Rs 70,000.
(iii) Goods costing Rs 15,000 withdrawn for personal use.
(iv) Goods costing Rs 50,000 sold for Rs 60,000.

• A. (iv)
• B. (i) and (ii)
• C. (ii) and (iii)
• D. (i) and (iii)

Hint:

Gross profit ratio changes only when sales and cost of goods sold change. A sale of goods does this, but a purchase or a withdrawal does not.

Answer 1

The Correct Option is A

Step 1: Formula:
Gross Profit Ratio = (Gross Profit / Revenue from operations) x 100.
Gross Profit = Revenue from operations less Cost of revenue from operations. A transaction affects the ratio only if it changes revenue or the cost of goods sold, or both.

Step 2: Check each transaction:
(i) Revenue from operations of Rs. 1,00,000 is only a figure of sales. It is not a new transaction and does not change the ratio by itself.
(ii) Purchase of goods of Rs. 70,000 adds to inventory. The cost moves to cost of revenue only when the goods are sold, so the ratio does not change now.
(iii) Goods of Rs. 15,000 withdrawn for personal use are not a sale. They add nothing to revenue from operations, so the ratio is not affected.
(iv) Goods costing Rs. 50,000 are sold for Rs. 60,000. Revenue rises by Rs. 60,000 and cost of revenue by Rs. 50,000. Gross profit on this sale is Rs. 10,000, a ratio of 10,000 / 60,000 x 100 = 16.67%.
This sale pulls the overall ratio toward 16.67%. So it changes the Gross Profit Ratio.

Step 3: Match with the options:
Only (iv) affects the ratio. Option (A) (iv) is correct.
(B) (i) and (ii) are wrong because neither sale nor cost of sales changes. (C) (ii) and (iii) are wrong because a purchase and a withdrawal are not sales. (D) (i) and (iii) are wrong for the same reason.

Final Answer:
Only the sale of goods in (iv) changes both revenue and cost of revenue. The answer is option (A).