Q5-23RQ - Horngren'S Financial And Managerial Accounting

Question

What does the gross profit percentage measure, and how is it calculated?

Step-by-Step Solution

Answer

The gross profit percentage measures a company’s ability to generate profits and cover its operating expenses.

Meaning of Gross Profit

The term “gross profit” is the difference between a business concern’s net sales and its cost of goods sold incurred to earn such revenues. It is reported on the income statement of the business concern.

Computation of gross profit percentage

The gross profit percentage denotes the percentage of profit left with the company after paying its cost of goods sold. It also represents the business’s ability to cover its operating expenses. 

The gross profit percentage is computed as follows:

$\text{Gross profit percentage}=\frac{\text{Sales revenue}-\text{Cost of goods sold}}{\text{Sales revenue}}\times 100$