Which of the following transaction will affect the 'Gross Profit Ratio' of a company :

(i) Revenue from operations Rs. 1,00,000

(ii) Purchased goods worth Rs. 70,000.

(iii) Goods costing Rs. 15,000 withdrawn for personal use.

(iv) Goods costing Rs. 50,000 sold for Rs. 60,000.

Q: Which of the following transaction will affect the 'Gross Profit Ratio' of a company : (i) Revenue from operations Rs. 1,00,000 (ii) Purchased goods worth Rs. 70,000. (iii) Goods costing Rs. 15,000 withdrawn for personal use. (iv) Goods costing Rs. 50,000 sold for Rs. 60,000.

**Correct option: (A) (iv).** Only transaction (iv) — goods costing Rs. 50,000 sold for Rs. 60,000 — changes the Gross Profit Ratio, because it alters BOTH the Gross Profit (numerator) and the Revenue from Operations (denominator) of the ratio simultaneously.

Accounting Ratios

Gross Profit Ratio

Options

(A)(iv)

(B)(i) and (ii)

(C)(ii) and (iii)

(D)(i) and (iii)

Official Answer

Correct option: (A) (iv).

Only transaction (iv) — goods costing Rs. 50,000 sold for Rs. 60,000 — changes the Gross Profit Ratio, because it alters BOTH the Gross Profit (numerator) and the Revenue from Operations (denominator) of the ratio simultaneously.

gross profit ratiocost of goods soldrevenue from operationstrading transactionclosing stockdrawings of goodsaccounting ratios

Marking Scheme

11 mark: correct option (A) (iv) selected.

Hint

Ask: does the item change BOTH Revenue from Operations and Gross Profit, or is it just base data / a matched item?

Quick Oral Answer

Gross Profit Ratio changes only when a transaction affects both Revenue from Operations and Gross Profit together — here that is the sale in (iv), since the purchase remains in stock and drawings are a routine COGS adjustment.

Analysis & Explanation

Concept: $\text{Gross Profit Ratio} = (\text{Gross Profit} \div \text{Net Revenue from Operations}) \times 100$ . Only an event that changes Gross Profit or Revenue from Operations (or both) can change this ratio.

Why (iv) is correct: Selling goods costing Rs. 50,000 for Rs. 60,000 is an actual sale — it adds Rs. 60,000 to Revenue from Operations and Rs. 50,000 to Cost of Revenue from Operations, creating a fresh Rs. 10,000 of gross profit. Both the numerator and denominator move, so the ratio necessarily changes.

Why the others don't count:

(i) merely restates the Revenue from Operations figure already earned — it is base data, not a new transaction that alters gross profit.
(ii) a purchase of Rs. 70,000 that remains unsold is matched by an equal increase in closing stock, so Cost of Goods Sold — and hence Gross Profit — is unaffected.
(iii) goods withdrawn for personal use are excluded from Cost of Goods Sold as a routine adjustment (Adjusted Purchases = Purchases − Drawings); this is a correction to arrive at the true COGS, not a fresh trading transaction that shifts the ratio.

Exam trap: Students often assume 'more cost items = more impact', but only a genuine trading transaction that moves both Sales and COGS actually shifts the Gross Profit Ratio.

Common Mistakes

1Assuming purchase of goods always changes Gross Profit Ratio, ignoring that unsold stock cancels the effect via closing stock.
2Believing goods withdrawn for personal use changes the ratio, when it is only a routine adjustment to Cost of Goods Sold.
3Selecting an option with two items instead of realising only the actual sale transaction (iv) changes both numerator and denominator.

Interesting Facts

Gross Profit Ratio is one of the oldest profitability ratios, rooted in double-entry trading account analysis used by 19th-century merchants.

A rising Gross Profit Ratio over years, without a corresponding rise in Net Profit Ratio, often signals ballooning operating expenses — a key red flag for analysts.

CBSE frequently tests this exact 'which transaction affects the ratio' format because it tests conceptual understanding of the ratio formula rather than rote calculation.

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Frequently Asked Questions

Why doesn't purchasing goods worth Rs. 70,000 affect the Gross Profit Ratio?

Because the goods remain unsold at year-end, closing stock increases by the same amount, so Cost of Goods Sold — and therefore Gross Profit — is unchanged.

Why doesn't withdrawal of goods for personal use affect the ratio?

It is a routine adjustment (subtracted from Purchases to compute the correct Cost of Goods Sold), not a fresh trading transaction, so it does not represent a change in the underlying profit-generating activity.