Gross profit

Profitability Ratios Tutorial 4 : The Gross Profit Ratio Part 1

• Report rights infringement
• published: 19 Mar 2015
• views: 4720

Full Master How Money Flows and Build Business Success Course https://goo.gl/F31MC1 Full Keys to Interpret Financial Statements Easily Course http://www.macsfinance.com/ Planning, Budgets and Cash Flow Course http://www.macsfinance.com/ Subscribe to Channel http://goo.gl/jvOvIS Free tutorials here http://www.macsfinance.com/previews WOW. Clicked here https://www.macsfinance.com and AMAZED how easy you can learn new finance skills from highly qualified professionals.No wonder others are sharing ! Finance for Non Finance Managers. Enrol for Finance Training at Macs Academy, courses at your online finance and accounting school. The Gross Profit Ratio - One of the most common basic accounting terms used in a business is gross profit. This figure helps calculate one of the key financial ratios in the profitability ratios group, the gross profit ratio. This can also sometimes be called the gross profit margin ratio or the gross profit percentage. Different names, same calculation. You will see how a financial ratio analysis of gross profit in the business can easily assess how good profits are. Whats is a gross profit definition? The definition of gross profit is simply sales less cost of sales.Learn where the accounting information to use in the gross profit method can be found in the income statement. So in summary this tutorial looks at the theory behind how to calculate one of the profitability ratios known as the gross profit ratio. We then us this theory and apply to a practical example using the fashion business of Fashion Mac. We will use the pro forma income statement from Fashion Macs business venture Fashion Mac Glam Handbags. Develop your online finance education. Enrol for Finance Training at Macs Academy, courses for you at our online finance and accounting school: https://www.macsfinance.com Follow Macs Finance at: https://www.facebook.com/macsfinancecom https://twitter.com/macsfinance https://www.google.com/+Macsfinance https://www.pinterest.com/macsfinance/ http://www.youtube.com/Macsfinance If you have any questions please don't be afraid to ask. Also, please do help support us to continue, subscribe, share or leave a video comment if possible. If you prefer to read rather than watch the video here is a summary transcript: "The key learnings in this tutorial will be really just to understand one of the main profitability ratios, namely the gross profit ratio. In order to do this we'll have to introduce one of the key financial statements, because this is where we're going to find the information. This key financial statement - you may know this one already - is simply called the income statement. So, we're going to look at a simple income statement. Sometimes you might also see this referred to as a profit and loss account and we're going to look at this through a worked practical example in a simple business to see how it works. The gross profit ratio formula is simply your gross profit divided by your sales, multiplied by 100%. So, in terms of the information to calculate it we'll need to go to the income statement and as I mentioned earlier this is also called the profit and loss account. The figures we will need are firstly, sales and depending on the business you might also see this called turnover or total income. We'll also need the gross profit which in any business is simply the sales of the business less the cost of sales in the business. So, here's an extract from Fashion Mac's new business, Fashion Mac Glam Handbags and it's for her income statement for the year ended 31st December 2011. So we can see straight away in that year that the sales of the business were £80,000, the cost of the sales were £60,000. This is the gross profit definition, which left us with a gross profit of £20,000 and that's simply your £80,000 sales less your cost of sales of £60,000 to give you £20,000 of gross profit. So, from this information, could you work out the gross profit ratio? We use our formula. What do we have? We have the £20,000, we divide it by the £80,000, so that's your £20,000 gross profit divided by your £80,000 of sales, and we multiply that by 100% and that gives us a percentage figure of 25%. So, what does this tell us? This tells us that the average gross profit margin achieved by the business across all its products in Fashion Mac Glam Handbags is 25%, or put another way, after deducting the costs of sales, every £1 of sales has made 25p of gross profit. Now, we could start to get very clever with this and we could go down another few levels because if the business has more than one product, what it could be very helpful to do is to calculate it for each of those products separately. So in other words if Fashion Mac learnt that she had, say, three top-selling luxury handbags and they were, by brand, Prada, Mulberry and a Gucci handbag, what she could do is look at the sales and the gross profit rate on each of those products separately.