gross profit

Examples of gross profit in the following topics:

• Gross Profit Method

  • The gross profit method uses the previous year's average gross profit margin to calculate the value of the inventory.
  • Keep in mind the gross profit method assumes that gross profit ratio remains stable during the period.
  • Determine the gross profit ratio.
  • Gross profit ratio equals gross profit divided by sales.
  • Use projected gross profit ratio or historical gross profit ratio whichever is more accurate and reliable.

• Cost of Goods Sold and Gross Profit

  • Gross profit or sales profit is the difference between revenue and the cost of making a product or providing a service.
  • In accounting, gross profit or sales profit is the difference between revenue and the cost of making a product or providing a service before deducting overhead, payroll, taxation, and interest payments.
  • Note that this is different from operating profit (earnings before interest and taxes).
  • Net income (or Net profit) = Operating profit – taxes – interest
  • Explain the difference between cost of goods sold and gross profit

• Impact of Inventory Method on Financial Statement Analysis

  • The inventory method chosen will affect the amount of current assets and gross profit income statement, especially when prices are changing.
  • Under FIFO: Ending Inventory is higher, and Total Current Assets are higher; cost of goods sold is lower, and gross profit is higher.
  • Under LIFO: Ending Inventory is lower, and total current assets are lower; cost of goods sold is higher, and gross profit is lower.
  • Under FIFO: Ending Inventory is lower, and total current assets are lower; cost of goods sold is higher, and gross profit is lower.
  • Under LIFO: Ending Inventory is higher, and total current assets are higher; cost of goods sold is lower, and gross profit is higher.

• Introduction to the Income Statement

  • The income statement is also referred to as a "profit and loss statement" (P&L), revenue statement, statement of financial performance, earnings statement, operating statement and statement of operations.
  • Net income is what is left after all the revenues and expenses have been accounted for, it is also known as "Net Profit. "
  • It takes several steps to find the bottom line, starting with the gross profit.
  • It then calculates operating expenses and, when deducted from the gross profit, yields income from operations.

• Income Statement Formats

  • An income statements may also be referred to as a profit and loss statement (P&L), revenue statement, statement of financial performance, earnings statement, operating statement or statement of operations.
  • A company's financial statement indicates how the revenue, money received from the sale of products and services before expenses are taken out, is transformed into the net income, the result after all revenues and expenses have been accounted for, also known as Net Profit.
  • In the multiple-step format revenues are often presented in great detail, cost of goods sold is subtracted to show gross profit, operating expenses are separated from other expenses, and operating income is separated from other income.
  • The income statement is used to assess profitability, as the expenses for the period are deducted from the revenues.
  • When net income is positive, it is a called profit.

• Recognition of Revenue Prior to Delivery

  • Percentage-of-completion method: if a long-term contract clearly specifies the price and payment options with transfer of ownership -- the buyer is expected to pay the whole amount and the seller is expected to complete the project -- then revenues, expenses, and gross profit can be recognized each period based upon the progress of construction (that is, percentage of completion).
  • For example, if during the year, 25% of the building was completed, the builder can recognize 25% of the expected total profit on the contract.

• Impact of Measurement Error

  • As a result, an incorrect inventory balance causes an error in the calculation of cost of goods sold and, therefore, an error in the calculation of gross profit and net income.

• Methods in Retail Inventory

  • Note that both the gross margin and the retail inventory methods can help you detect inventory shortages.

• What Is R&D?

  • Under both models, R&D differs from the vast majority of a company's activities which are intended to yield nearly immediate profits or immediate improvements in operations and involve little uncertainty as to the return on investment (ROI).
  • The extreme needs justify the high risk of failure and consequently high gross margins from 60% to 90% of revenues.
  • Gross profits will be as much as 90% of the sales cost, with manufacturing costing only 10% of the product price, because so many individual projects yield no exploitable product.

• Selecting an Inventory Method

  • However, the gross margin on the sale could be either USD 800, USD 700, or USD 600, depending on which unit the company ships.
  • The disadvantages of FIFO include the recognition of paper profits and a heavier tax burden if used for tax purposes in periods of inflation.
  • The resulting gross margin is a better indicator of management's ability to generate income than gross margin computed using FIFO, which may include substantial inventory (paper) profits.