Business Mathematics

Qtr 1- Week 6
Lesson 1: Profit or Loss
Now that you know about markup, markdown, and markup cancellation, let us study profit or loss. Profit is what remains of the selling
price (sales) after all costs and expenses had ben deducted. Cost means the cost of the product sold or services rendered. Expenses refer to operating
expenses (administrative and selling expenses) and financial expenses (interest and other finance charges). Loss occurs when the cost and expenses
exceed the selling price or sales. You will learn more about this concept of profit or loss as we go along.
Determining the profit or loss involves a simple addition and subtraction. The revenue is a plus item. All expenses are minus items and,
therefore, deducted from the revenue. The result is a profit if it is positive and a loss if it is negative.
Income Statement for a Trading Firm
A trading or merchandising firm bus goods that it sells. Whatever it buys, it sells; if it buys shoes, it sells shoes.; and if it buys dresses, it sells
dresses. The account used to report the selling price of the merchandise is sales. Gross sales refer to the total sales. Sales discounts and sales return
and allowances ae deducted from the gross sales to arrive at the net sales. How much the seller buys the item is the cost of the item. It is termed
cost of goods sold or cost of sales.
An Income Statement is the financial statement that shows the results of operation, that is, if it earns a profit or incurs a loss for a given
period of time. Generally, a firm prepares the financial statement on a monthly basis. For tax purposes, it is prepared quarterly and annually. It details
the sales, the cost of sales, the operating expenses, and other expense and/or other income, if any. Below is a sample income statement of a trading
firm.

Matatag Merchandising
Income Statement
For the Year Ended June 30, 2018

Sales P117,000.00
Less: Cost of Sales P59,000.00
Gross Profit P58,000.00
Less: Operating Expenses
Communication Expense P1,000.00
Delivery Expense 5,000.00
Rent Expense 5,500.00
Salary Expense 8,300.00
Bad Debts Expense 600.00
Office Supplies Expense 700.00
Store Supplies Expense 1,500.00
Depreciation Expense, Furniture and equipment 1,000.00 23,600.00
Operating Profit 34,400.00
Add: Other Income
Interest Income 800.00
Commission Income 1,500.00 2,300.00
Less: Other Expense
Interest Expense 1,200.00 1,100.00
NET PROFIT P35,500.00

The cost of sales is the purchase price and other expenses incurred in buying the products that the business has to sell including the freight-
in or transportation of the goods it buys for resale. Operating expenses are expenses incurred to run the business. Other income includes interest
income and other incidental income the firm earns like rent income if it has a property that it rents out. Other expense includes interest expense or
finance charges financial institutions charge firms for their services. The gross profit is at times referred to as gross margin that we have previously
studied. Operating profit/loss is gross profit less operating expenses. Net profit/loss is operating profit plus other income less other expense.

Activity 1
1. You bought a bag for P800.00. You spent P50.00 for transportation in going to the store to buy it. For the following independent cases,
determine whether you earn a profit or incurred a loss. Determine how much your profit or loss was.
a. You sold the bag to your friend for P1,000.00
b. You sold the bag to your friend for P700.00.
2. Abigail purchased a suitcase for P1,200.00. She paid P120.00 for delivery of the suitcase from the seller to her place. She a sked the
help of Bernadette to sell the suitcase. She promised to give Bernadette P150.00 if Bernadette could sell the suitcase for P2,000.00.
Bernadette was able to sell the suitcase for P1,900.00 to which Abigail agreed. How much profit did Abegail get?
Activity 2
A Trading Firm purchased a lot for merchandise that costs P100,000.00 for which it paid P10,000.00 for transportation. The firm sold the
entire lot for P180,000.00. The firm incurred the following operating expenses:
Rent P3,000
Advertising 15,000
Store Supplies 7,000
Office Supplies 4,000
Heat, light and water 9,000
Miscellaneous Expenses 5,000
The firm borrowed money from the bank for which it paid P6,000 in interest. Prepare the income statement of the firm.

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Activity 3
The Excelsior Company Merchandising purchased merchandise costing P250,000 for the current month. It paid P10,000 for freight
(transportation) for the shipment of the goods from the seller to its store. It insured the merchandise for P25,000. It sold 75% of the merchandise
for P220,000. Calculate all costs associated with the merchandise. For the current month, it incurred the following expenses:
Delivery Expense P15,000
General Administrative Expense P50,000
Miscellaneous Marketing Expense 75,000
Utilities expense 30,000

For the current month, the firm earned interest on the promissory notes of its customers amounting to P12,000. It paid interest to the
bank on a loan it took amounting to P8,000.00.
Prepare an income statement of the Excelsior Merchandising for the current month.

Activity 4

You were given the following data for the Summit Marketing Co. as of January 31, 2020:
Sales P127,500
Purchases (merchandise) 57,000
Freight in 5,000
Taxes and Licenses 900
Communication Expense 300
Heat, light, and water 1,240
Store supplies expense 1,180
Office supplies expense 730
Miscellaneous expense 2,090

a. How much is the cost of sales? What percent is it of the sales?

b. What is the margin or gross profit? How much is the amount in peso? How much is the gross profit rate?
c. What is the markup based on cost?
d. How much is the operating profit? What percent is it of sales?
e. How much is the net profit? What percent is it of sales?
f. Prepare an income statement.