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Questions
What is meant by 'Profitability' of business?
What is meant by 'Profitability Ratios'?
Solution
Profitability of a business is the ability of a business to earn revenue and make profit out of the investments. A profit is simply the revenue left over after all the costs and expenses related to the business activities are paid. It is the measure of efficiency and success of the business. Some of the ratios that help us to measure the profitability of the business are Gross Profit Ratio, Operation Ratio, Operating profit Ratio, etc. The ratios help to understand the income earning capacity of business and income actually earned by the business.
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RELATED QUESTIONS
Assertion (A): Increasing the value of closing inventory increases profit.
Reason (R): Increasing the value of closing inventory reduces cost of goods sold.
Read the following hypothetical extract of ABC Ltd. and answer the question that follows:
The following information is given:
| Trade Receivables Turnover Ratio | 4 times |
| Current Liabilities | ₹ 5,000 |
| Average Debtors | ₹ 1,80,000 |
| Working Capital Turnover Ratio | 8 times |
| Cash Revenue from Operations | 25% of Revenue from Operations |
| Gross Profit Ratio | `33 1/3%` |
What is the Gross Profit?
In the year 2021-22, Kartik Ltd.:
- Carried an average stock of ₹ 40,000
- Its Inventory Turnover Ratio was 8 times.
- It sold goods at a profit of 25% on the cost of revenue from operations.
Calculate the profit made by Kartik Ltd. in the year 2021-22.
