APDE-CAMPOALEGRE

SECONDARY SECTION
ACCOUNTING III COURSE
HOMEWORK ACTIVITY
The Trading Account

Vocabulary:

Inventories and stocks are raw materials or goods that have been acquired by the firm for future sale
but have not yet been sold.

Revenues are monies from the sale of goods, or Price x Quantity. Sales can be a money value or a unit
depending on context but revenues are always a money amount.

The trading account shows GROSS PROFIT. It is the first section of the Income Statement.

Gross indicates that nothing has been subtracted.

Gross Profit is profit without any subtractions, i.e. with expenses still included. When compared with
revenue, it indicates the role or impact of direct costs on business profits.

Gross profit is the difference between the sales revenue and the cost to the business of its sales.

Revenues from Sales $ XXXX

minus Cost of Goods - XX
equals Gross Profit $ XXX

Revenue from sales is the income earned from the sale of goods (trading activity).

Cost of sales means the direct costs needed to earn the revenues. Cost of goods has effectively the same
meaning as cost of sales. The two terms are used interchangeably; both refer to direct costs.

Cost of goods is the direct cost of producing or buying the goods sold during the period.

Opening Stock $ XXXX

plus New Stock + XX
minus Closing Stock - XX
equals Cost of Goods = XXX
Problem Set 1

a. A business has inventories (stock) worth $700 at the start of a trading period. It purchased $300
additional inventories. At the end of the period it had $200 worth of inventories. What is CoGs?
b. A business used $1000 worth of materials and paid workers $1500 to earn $5000 during a
trading period. What is CoGs?
c. A firm valued its opening stock at $3000 and made additional purchases of $1000 during the
period that followed. If its CoGs was $2000, what is the value of closing inventory?
d. A business had opening inventories of $20 000 and purchased $5 000 new items. The closing
inventory was $7 000. If it had sales revenues of $15 000, what was CoGs? What gross profit was
earned during the period?
e. A business had closing inventories of $2 000 and opening inventories of $3000 with additional
purchases of $500 made during the period. If Sales of $1000 were booked, how much Gross
Profit did the firm make?

Problems Set 2

a. Business A has a gross profit of $200 on sales of $1 000, while business B has gross profit of $200
on sales of $500. Which company has the lower cost of sales? Which company is the “better”
company in terms of its profit, and in terms of its cost of sales?

b. A firm at the start of a trading period had $3 000 worth of stock and then it bought an additional
$500. The company closed the period with stock valued at $1000. What is CoGs?

What would its gross profit be if it sold 600 units of a product at $5 each?

c. A firm has gross profits of $2 000 on sales of $5 000. If starting inventories were $1 000 and
ending inventories were $2 000, what additions were made to inventories?

SUMMARY

The trading account shows how much direct cost it takes for the business to earn its revenues. Direct
costs are subtracted from revenues to give Gross Profit. Gross Profits are largely determined by market
forces and so they are beyond the immediate control of managers. Gross Profit is a reflection of the
profits available in the industry.