Understanding the Net Profit Ratio Calculation

The question asks us to calculate the Net Profit Ratio of a company. To do this, we need two main components: Net Profit and Revenue from Operations (also known as Revenue from Operations or Sales). The formula for Net Profit Ratio is:

\(\text{Net Profit Ratio} = \left( \frac{\text{Net Profit}}{\text{Revenue from Operations}} \right) \times 100\)

We are given the Gross Profit Ratio, Credit Revenue from Operations, the relationship between Cash Revenue and Total Revenue, and Indirect Expenses. We need to use this information to find the Net Profit and Total Revenue from Operations.

Step 1: Calculate Total Revenue from Operations

We are given:

• Credit Revenue from Operations = ₹20,00,000
• Cash Revenue from Operations is 20% of Total Revenue from Operations

Let's denote Total Revenue from Operations as \(R\). Then, Cash Revenue from Operations is \(0.20R\).

Total Revenue from Operations is the sum of Credit Revenue and Cash Revenue:

\(R = \text{Credit Revenue} + \text{Cash Revenue}\)

\(R = ₹20,00,000 + 0.20R\)

Now, we can solve for \(R\):

\(R - 0.20R = ₹20,00,000\)

\(0.80R = ₹20,00,000\)

\(R = \frac{₹20,00,000}{0.80}\)

\(R = ₹25,00,000\)

So, Total Revenue from Operations is ₹25,00,000.

We can also find the Cash Revenue from Operations:

\(\text{Cash Revenue} = 0.20 \times ₹25,00,000 = ₹5,00,000\)

Check: Credit Revenue (₹20,00,000) + Cash Revenue (₹5,00,000) = Total Revenue (₹25,00,000).

Step 2: Calculate Gross Profit

We are given the Gross Profit Ratio is 25% and we just calculated Total Revenue from Operations (₹25,00,000).

The formula for Gross Profit Ratio is:

\(\text{Gross Profit Ratio} = \left( \frac{\text{Gross Profit}}{\text{Revenue from Operations}} \right) \times 100\)

We can rearrange this to find Gross Profit:

\(\text{Gross Profit} = \text{Gross Profit Ratio} \times \text{Revenue from Operations}\)

\(\text{Gross Profit} = 25\% \times ₹25,00,000\)

\(\text{Gross Profit} = 0.25 \times ₹25,00,000\)

\(\text{Gross Profit} = ₹6,25,000\)

So, the Gross Profit is ₹6,25,000.

Step 3: Calculate Net Profit

Net Profit is calculated by deducting all operating and non-operating expenses from Gross Profit. We are given that Indirect Expenses are ₹50,000. Indirect Expenses include items like office expenses, selling expenses, etc., which are deducted from Gross Profit to arrive at Net Profit before tax (or Net Profit if no tax information is given).

\(\text{Net Profit} = \text{Gross Profit} - \text{Indirect Expenses}\)

\(\text{Net Profit} = ₹6,25,000 - ₹50,000\)

\(\text{Net Profit} = ₹5,75,000\)

So, the Net Profit is ₹5,75,000.

Step 4: Calculate Net Profit Ratio

Now we have Net Profit (₹5,75,000) and Total Revenue from Operations (₹25,00,000).

Using the formula for Net Profit Ratio:

\(\text{Net Profit Ratio} = \left( \frac{\text{Net Profit}}{\text{Revenue from Operations}} \right) \times 100\)

\(\text{Net Profit Ratio} = \left( \frac{₹5,75,000}{₹25,00,000} \right) \times 100\)

\(\text{Net Profit Ratio} = 0.23 \times 100\)

\(\text{Net Profit Ratio} = 23\%\)

Thus, the Net Profit Ratio is 23%.

Revision Table: Key Ratios and Formulas

Additional Information on Profitability Ratios

Profitability ratios are crucial financial metrics used to assess a company's ability to generate earnings relative to its revenue, operating costs, balance sheet assets, or shareholders' equity. They provide insights into how effectively a company is managing its operations to produce profits.

• Gross Profit Ratio: This ratio focuses on the profitability of core sales activities after accounting for the direct costs involved in producing goods or services. A higher ratio indicates efficient production or purchasing processes.
• Net Profit Ratio: This ratio provides a comprehensive view of profitability as it considers all costs and revenues, including operating expenses, interest, and taxes. It shows the final profit margin on sales. A higher net profit ratio suggests better overall cost management and financial performance.
• Other important profitability ratios include Operating Profit Ratio, Return on Investment (ROI), Return on Equity (ROE), etc.
• Analysing these ratios over time and comparing them with industry averages helps in understanding trends in profitability and benchmarking performance.