T.S. Grewal Class 12 Vol 3 Chapter 4 Q.144 - Accounting Ratios

Question 144

Gross Profit Ratio of a company is 25%. State, giving reason, which of the following transactions will (a) increase, (b) decrease, or (c) not alter the Gross Profit Ratio:
(i) Purchase 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(iv) Stock-in-Trade costing ₹20,000 withdrawn for personal use.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.

Solution

Transaction	Effect on Gross Profit Ratio	Reason
(i)	No Change	Both Purchases and Closing Inventory increase by the same amount, so Cost of Revenue from Operations remains unchanged.
(ii)	No Change	Both Purchases and Closing Inventory decrease by the same amount, so Cost of Revenue from Operations remains unchanged.
(iii)	No Change	Revenue from Operations increases and Closing Inventory decreases by the same percentage (not the same amount) — so Cost of Revenue from Operations increases in the same proportion as Revenue.
(iv)	No Change	Both Purchases and Closing Inventory decrease by the same amount, so Cost of Revenue from Operations is unaffected.
(v)	No Change	Cost of Revenue from Operations is unaffected, as Purchases effectively reduces by ₹15,000 while an indirect expense (Sample Expense A/c) increases by the same amount.