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ENTRPRENEURSHIP
Quarter 2 – Module 7:
Compute Profits and
Projected
Financial Statements
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 What I Need to Know

In this module, you will know what is profit and its importance, how it is
calculated and how to record data. Profit is an essential outcome of
running a business. Often, earning a profit is the business or company's
primary goal. A positive bottom line shows that the company is healthy
and performing well. Profit is capital that companies can use for a variety
of purposes like maintaining the workplace or equipment, replacing or
upgrading vehicles or other low and highcost items, or investing in new
products, services or employees. With good profits, businesses can expect
to continue flourishing.

Learning Competencies:
Compute for profits
CODE: CS_EP11/12ENTREP-0h-j-16

Create the company’s five (5) year projected financial statements

CODE: CS_EP11/12ENTREP-0h-j

After going through the module, you are expected to:

K: compute for profits;
S: show a 5-year financial statement of a proposed business;

A: be determined in performing activities required.

What I Know

Task 1

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Direction: Write True if the statement is correct & write False if you think
the answer is not correct. Do this in your notebook.

_________1. The gross profit rate of the entrepreneurial venture is

computed by dividing the cost of goods sold by net sales.
________ 2. The gross profit rate provides information on the cost ratio of
the business.
_________ 3. In evaluating the profitability of the entrepreneurial venture,
the evaluation must focus on the information reflected on the
face of the balance sheet.
_________ 4. The operating profit margin rate indicates information on the
percentage of operating expenses on the net sales.
_________ 5. Mr. Q is a practicing Doctor of Medicine. During the month of
March 2019 he received professional fees amounting to
Php 1,000,000 and total expenses of Php 250,000. The net
income of Mr. Q is Php 750,000.
_________ 6. Profit is the money received from customer in exchange of
products given to customer.
_________ 7. The gross profit rate of the entrepreneurial venture is
computed by dividing the cost of goods sold by net sales.
_________ 8. The gross profit rate provides information on the cost ratio of
the business.
_________ 9. One of the objectives in evaluating the gross profit rate of the
business is to determine whether the amount of the gross profit
is sufficient to cover the operating expenses.
________ 10. The operating profit margin rate indicates information on the
percentage of operating expenses to net sales.
________ 11. The government is not interested in financial statements
since it is not a party to any of the transactions of the
business. ________ 12. The net profit margin rate presents the general
perspective of the operating performance of the business.
________ 13. The amount of income per peso investment can be
determined by computing the net profit margin rate.
________ 14. In normal situation, it is favorable for the business to have
high inventory.
________ 15. Preparation & presentation of the financial statements of the
entity is the primary responsibility of an accountant.

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 Lesso
n Computing Profits and
Projected Financial Statements
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Whether a business is a start-up or already established, business
implementation becomes the responsibility of all the employees.
Implementation is the process of executing a plan or policy so that a
concept becomes a reality. To implement a plan properly, managers should
communicate clear goals and expectations, and supply employees with
the resources needed to help the company achieve its goals.

What’s In

Task 2

Direction: Discuss briefly your insight of the quotation hereunder. Write

your explanation on your notebook.

“Running a business well means knowing when it’s time

to make profit.”
- Auliq Ice
_____________________________________________
_____________________________________________
_____________________________________________

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 Notes to the Teacher
Theability to listen is as important as the ability to
- speak.”
Sheryl Sandberg

What’s New
Task 3

Direction: Read and understand the given problem.

Problem: Rhea is engaged in a buy-and-sell business of signature

perfumes. She buys 10 boxes of perfumes. Each box costs
12,000.00 and contains a dozen of perfume bottles. She plans to
sell one perfume bottle at P1,500. What is her expected profit
on the 10 boxes of perfumes?

Note: Getting the difference between the amount of money earned from
selling 10 boxes containing a dozen of perfume bottles and the cost of
those 10 boxes gives the profit.”

Explore!

1. How much profit does Rhea earn?

2. What do you think of Rhea’s business?
3. Is it good for a beginner? Why?
4. What do you think should Rhea do in order to flourish in her business?

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 What is It

Welcome to computing PROFIT.

The simplest formula is: total revenue – total expenses = profit.

Profit is calculated by deducting direct costs, such as materials and

labor and indirect costs (also known as overheads) from sales. Under
normal accounting rules, sales and expenses are included in profit when
they occur, not when they are actually paid so profit will include credit
sales and purchases even when they are yet to be paid.

Source: https://informi.co.uk/finance/how-do-i-calculate-profit.

Why is profit important?

It is important for a business to understand how much profit they’ve

made to give it an idea as to whether the business is successful. With so
much money going in and out of a business, it is not always easy to see
whether what a small business owner is doing is actually making money.
By calculating profit, it helps give some clarity. If a business is making a
profit it can:
• expand and grow
• attract more investment
• employ more staff.

It is worth mentioning that profit is different to cash. Some things

will affect the cash flow of the business, but won’t affect profit e.g. money
taken out of the business for personal use. Likewise, some items will affect
profit but will not affect cash such as provisions e.g. where a business
makes an adjustment for a customer not paying.
https://informi.co.uk/finance/how-do-i-calculate-profit.

What Is Gross Profit?

Gross profit is the revenue a business brings in after covering the

expenses required to make a sale. Simply put, gross profit is a business’s
total sales, less the cost of goods sold.

Source: http://www.businessdictionary.com

What Is the Gross Profit Formula?

The equation for calculating gross profit is simple:
Sales – Cost of Goods Sold = Gross Profit

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 To fully understand gross profit, however, you have to understand
the difference between variable and fixed expenses.
Fixed Expenses
• Fixed costs don’t change based on production. Examples of fixed
costs include:
• Rent
• Insurance
• Salaries of employees
• Payroll taxes and employee benefits
• Property taxes

Variable Expenses
On the other hand, variable expenses are costs that can change
based on how much you’re producing. Examples of variable costs include:

. Materials used .
Shipping costs
. Direct labor
. Credit card fees
. Sales staff commissions

Both fixed costs and variable costs can have a large impact on gross
profit. The more you can keep your fixed costs down and lower your
variable costs, the greater gross profit you can expect.

Cost of Goods Sold

The cost of goods sold is the price of all inventory sold which
includes both fixed and variable costs. http://www.businessdictionary.com

As is often the case, however, quite a bit of data can get buried in
the “cost of goods sold.”

This can include merchandise purchased for resale, raw materials,

labor costs, and sometimes merchant account fees. Business accountants
and bookkeepers can debate for days about what expenses actually
belong in the cost of goods sold. You can help them out by making sure
your accountant or bookkeeper has a good understanding of your business
operations—you want them to set up your chart of accounts with the
appropriate costs posted to the cost of goods sold.

How to Calculate Gross Profit Example

Let’s pretend you own a stand on the beach, and you sell snorkel
sets. The only cost associated directly with making a sale is the amount
you paid to purchase the snorkel sets you are selling to folks who come to
the beach unprepared.

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 If you price your snorkel sets at 200.00 each and you sell 10 sets
before you hit the waves at noon, you will have made P2000 in sales.

200.00 per snorkel set x 10 snorkel sets sold = P2000 in sales

But you have to pay for the snorkel sets you sold.

Chances are you paid in full before your supplier shipped them to
you, but you need to replenish your stock—otherwise, you won’t have
anything to sell and your beach stand will go out of business. Let’s
pretend you purchased your snorkel sets for 85 each. The cost of the 10
snorkel sets you sold, then, is 850.
85.00 cost per snorkel set x 10 snorkel sets purchased for resale =
850.00 in cost of goods

This means your gross profit is P1150:

P2000 in snorkel set sales – 850.00 paid to snorkel set supplier =

P1150 gross profit

This Php 1150, in turn, gets used to maintain your beach stand, advertise
at the tiki hut down the shore, etc.
Gross profit, then, is the money you have available to run your
business after paying for the goods or services that let you make the sales
in the first place. https://www.wikihow.com/Calculate-Profit
How to Calculate Gross Profit Margin
The gross profit formula can also be used to calculate your gross
profit margin. The gross profit margin is a good way to measure your
business’s production efficiency over time. Whereas gross profit is a peso
amount, the gross profit margin is a percentage.

The gross profit margin formula is:

Gross profit margin = Gross profit (Revenue – Cost of goods sold)
/ Revenue

Because gross profit can rise while gross profit margins can fall, it
can be misleading to simply calculate just gross profit without considering
the gross profit margin.
Source: https://www.fundera.com/blog/how-to-find-gross-profit

Analyze the Liquidity Status of the Business Liquidity Ratios

Current ratio = Current assets / Current liabilities

Quick ratio = (Current assets – Inventories) / Current liabilities = (Cash

and

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 equivalents + Marketable securities + Accounts receivable) /
Current liabilities
The quick ratio measures its short-term obligations with its most liquid
assets and therefore excludes inventories from its current assets. .

Financial statements are important in a company management as a

means of communicating past successes as well as future expectations.
The financial statement records all the operating results such as sales,
expenses and profits or losses.
Return of Investment (ROI)

The Return of investment (ROI) measures the amount of net income

per peso invested to the business.http://www.businessdictionary.com

The formula to compute ROI is as follows.

Return on investments = Net income
Average total assets

The average total assets are by dividing the sum of the total assets
at the beginning and end of the period.

Balance Sheet includes spending and income that isn’t in the Profit
and Loss. For example, the money you spend to repay a loan or buy new
assets doesn’t show up in the Profit and Loss. And the money you take in
as a new loan or a new investment doesn’t show up in the Profit and Loss
either. The money you are waiting to receive from customers’ outstanding
invoices shows up in the Balance Sheet, not the Profit and Loss. The
Balance Sheet shows many reasons why profits are not cash, and why
cash flow isn’t intuitive. It’s all related to the essential principles of cash
flow.

The Balance Sheet shows your financial picture – assets, liabilities,

and capital – at some specific moment. It helps to understand that the
Profit and Loss shows financial performance over a length of time, like a
month, quarter, or year. The Balance, in contrast, is a moment. Usually it’s
the end of the month, quarter, or year. Sometimes it’s the end of the
business day.

Balancing is a common term associated with bookkeeping,

accounting, and finance. We “balance the books.” It’s a lot like reconciling
a checkbook: if it isn’t right down to the last penny, then it’s wrong. Assets
have to equal liabilities plus capital. Always.

A traditional Balance Sheet statement shows assets on the left side

and liabilities and capital on the right side or the bottom, as in this
illustration:

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 Projected balance sheet

Table 1. source: leanplan.com

The balance sheet involves the other three of the six key financial
terms (the ones that aren’t on the Profit and Loss: Assets, Liabilities, and
Capital).

▪ Assets. Cash, accounts receivable, inventory, land, buildings, vehicles,

furniture, and other things the company owns. Assets can usually be
sold to somebody else. One definition is “anything with monetary
value that a business owns.”
▪ Liabilities. Debts, notes payable, accounts payable, amounts of
money owed to be paid back.
▪ Capital (also called equity). Ownership, stock, investment, retained
earnings. Actually there’s an iron-clad and never-broken rule of
accounting: Assets = Liabilities + Capital. That means you can
subtract liabilities from assets to calculate capital.

Although traditional printed balance sheet statements are usually

arranged horizontally, as in the illustration above, balance sheets in
financial projections are usually arranged vertically, showing the assets
first, then the liabilities, and then the capital. Here, for example, is the
balance sheet for the first few months of the bike store I mentioned

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earlier. It’s the balance sheet associated with the Profit and Loss for the
same company, Garrett’s bicycle store:

Projected 4 months financial statement

Garrett’s bicycle store
Table 2 Source: Leanplan.com

Here is another example of projected balance sheet and financial

statement for five years.

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 Yearly increase in revenue is assumed at 5%

Yearly increase in cost is assumed at 5%

As a future entrepreneur, one should always remember that nothing

is permanent in the field of entrepreneurship. What is applicable to one
entrepreneur may not be applicable to another. Certain things may
happen to one entrepreneur but may not happen to another.
Entrepreneurship should be practiced not as a science but as an art.
Creativity should always be applied to entrepreneur by regularly

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evaluating the market and the environment and responding to the
changes in them.

The owner of an ordinary small business has the freedom to manage

and operate. Ideally, he/she prefers business activities which are done
easily. However, the entrepreneur has to perform the entrepreneurial
activities correctly regardless of whether they are undertaken easily or
not. The important in entrepreneurship is that the business activities are
performed correctly.

http://www.smarta.com/advice/business-planning/business-
plans/how-to-makerevenue-forecasts/ Katie Jensen, “Factors Considered in
Financial Forecasting.” Chron. Hearst Newspapers. Acessed December 10,
2018.

What’s More

Task 4

Direction: Do what are asked. Accomplish this in your notebook.

1. Annie bought one dozen smartphones for Php 200,000.00 with a

discount of 5%. She sold at a price of Php 18,000.00 per unit.
However, a new model of smartphone became available in the market,
so she sold the remaining half dozen at Php 12,000.00 each unit.
What was her profit or loss? Compute the gross profit.

What I Have Learned

Task 5

Direction: In your notebook, complete the following statements.

1. I have learned that

_____________________________________________________________________
_____________________________________________________________________

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 2. I have realized that
_____________________________________________________________________
_____________________________________________________________________

2. I will apply what I have learned

_____________________________________________________________________
_____________________________________________________________________

What I Can Do

Task 6

Direction: Accomplish the table to make a 5-year financial statement of

a proposed business.

Yearly increase in revenue is assumed at 10%

Yearly increase in cost is assumed at 10%

1. Assuming that you have P1,450,000 revenue that will increase10%

annually with proportionate increase of 10% of the cost P1,150,000
annually. ( note: Given figures will be fill-in in the first year round of the
business.
2. Compute the gross profit base on the given revenue and cost.
3. Provide your own name of the Business.

Projected five year income statement

___________________________
Name of the Business
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue
cost
Gross

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 profit

Assessment

Task 7

How did you understand the lessons that you have studied in this module?
Answer the following questions. Choose the correct answer of the given
choices.
_________1. It is the profit of the company that made after deducting the
cost.
A. Net Profit
B. Gross profit
C. Profit shares
_________2. The income generated from normal business operations and
includes discounts and deductions for returned merchandise.
A. Revenue
B. Profit
C. Sales

_________3. It shows the financial picture – assets, liabilities, and capital –

at some specific moment.
A. Income statement
B. Balance sheet
C. Projected five year forecast
_________4. It is the ratio between net profit and cost of investment.
A. Return of Investment
B. Total sales
C. Assets

_________5. Mr. Q is a practicing Doctor of Medicine. During the month of

March 2019 he received Professional Fees amounting to P
1,000,000 and total expenses of P250,000. The net income of
Mr. Q is___________
A. P 750,000

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 B. P 450,000
C. P 500,000
_________6. It is the money received from customer in exchange of
products given to customer.
A. Sales
B. Profit
C. shares
_________7.The price of all inventory sold which includes both fixed
and variable costs.
A. Cost of good sold
B. Total sales
C. Net sales
_________8. Anything with monetary value that a business owns.
A. Liabilities
B. Assets
C. Expenses
_________ 9. The following are belongs to the fixed costs EXEPT
____________.
A. Rent
B. Salaries of employees
C. Material used
_________10. The simple formula in getting the profit.
A. total revenue – total expenses = profit
B. Total expenses + total revenue = profit
C. Total sales- variable cost = profit
_________11. it is one of the financial statements of a company and shows
the company’s revenues and expenses during a particular
period.
A. Balance sheet
B. Revenues
C. Income statement
_________12. The term used for the goods available for sale and raw
materials used to produce goods available for sale.
A. Net sales
B. Inventory C. Production
sales _________13. Also called equity.
A. Capital
B. Expenses
C. liabilities

_________14. In normal situation, it is favorable for the business to have

high inventory.
A. Necessarily
B. Not necessarily

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 C. If it is only needed

_________15. Preparation & presentation of the financial statements of the

entity is the primary responsibility of ________________.
A. a lawyer
B. a mayor
C. an accountant

Additional Activities

“Proper business record keeping provides the business a real advantage over
the competition in different ways. ”

Give some thought of the above statement.

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References
ELECTRONIC RESOURCES
1.https://www.tutorialspoint.com/entrepreneurship_development/entrepre
neurship_devel opment Business Dictionary.

1. http://www.businessdictionary.com/defination/market-size.html
“Forecasting” Businessdictionary, Accessed December 10,
2018, http://www.businessdictionary.com/definition/forecasting.html
“How to Make Revenue Forecasts” Smarta, Accessed December 10,
2018,

2. http://www.smarta.com/advice/business-planning/business-plans/howto-
makerevenue-forecasts/ Katie Jensen, “Factors Considered in Financial
Forecasting.” Chron. Hearst Newspapers. Acessed December 10, 2018.
https://smallbusiness.chron.com/factorsconsidered -financial-
forecasting80716.html

3. https://www.slcbookkeeping.com/blog/bid/207078/Bookkeeping-Tasksfor-
Every-Partof-the-year https://www.thebalancesmb.com/steps-
toincrease-small-business-profits-1200720
https://www.wikihow.com/Calculate-Profit

4. Google.com

5. Investopedia.com- Glossary items

BOOKS RESOURCES

1. Business finance by: Roberto G. Medina, 2nd

edition,Rex
Bookstore.1977,reprinted 2011.

2. Entreprenenurship by: Feliciano Fajardo, National bookstore, 1955.

For inquiries or feedback, please write or call:

Department of Education
– Schools Division of Negros Oriental
Kagawasan, Avenue, Daro, Dumaguete City, Negros Oriental

Tel #: (035) 225 2376/ 541 1117

Email Address:[email protected]
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