Definition of Gross Profit
Revenue less cost of goods sold.
The difference between the price at which goods or services are sold and the cost of sales.
Income The revenue generated from the sale of goods or services.
The profit a company makes before expenses and taxes are taken away.
The result of subtracting cost of goods sold from sales. Synonymous with gross margin.
This first-line measure of profit
equals sales revenue less cost of goods sold. This is profit before operating
expenses and interest and income tax expenses are deducted. Financial
reporting standards require that gross margin be reported in
external income statements. gross margin is a key variable in management
profit reports for decision making and control. gross margin
doesn’t apply to service businesses that don’t sell products.
gross profit divided by sales, which is equal to each sales dollar left over after paying
for the cost of goods sold.
gross profit divided by revenue.
An accounting statement that summarizes information about a company in the following format:
– Cost of goods sold
– Operating expenses
Earnings before income tax
– Income tax
= Net income or (Net loss)
Formally called a “consolidated earnings statement,” it covers a period of time such as a quarter or a year.
The profit made by the business for an accounting period, equal to gross profit less selling, finance, administration etc. expenses, but before deducting interest or taxation.
This is a key factor in the profit model of a business. Product
cost is the same as purchase cost for a retailer or wholesaler (distributor).
A manufacturer has to accumulate three different types of production
costs to determine product cost: direct materials, direct labor, and
manufacturing overhead. The cost of products (goods) sold is deducted
from sales revenue to determine gross margin (also called gross profit),
which is the first profit line reported in an external income statement
and in an internal profit report to managers.
The general term profit is not precisely defined; it may refer to net
gains over a period of time, or cash inflows less cash outflows for an
investment, or earnings before or after certain costs and expenses are
deducted from income or revenue. In the world of business, profit is
measured by the application of generally accepted accounting principles
(GAAP). In the income statement, the final, bottom-line profit is generally
labeled net income and equals revenue (plus any extraordinary gains)
less all expenses (and less any extraordinary losses) for the period. Inter-
nal management profit reports include several profit lines: gross margin,
contribution margin, operating profit (earnings before interest and
income tax), and earnings before income tax. External income statements
report gross margin (also called gross profit) and often report one
or more other profit lines, although practice varies from business to
business in this regard.
The ratio of net income to net sales.
The ratio of net income before taxes to net sales.
The cumulative book income plus any gain or loss on disposition of the assets on termination of the SAT.
This equals the cash inflow from sales during the period minus the cash
outflow for expenses during the period. Keep in mind that to measure
net income, generally accepted accounting principles require the use of
accrual-basis accounting. Starting with the amount of accrual-basis net
income, adjustments are made for changes in accounts receivable,
inventories, prepaid expenses, and operating liabilities—and depreciation
expense is added back (as well as any other noncash outlay
expense)—to arrive at cash flow from profit, which is formally labeled
cash flow from operating activities in the externally reported statement
of cash flows.
The profit made by a division after deducting only those expenses that can be controlled by the
divisional manager and ignoring those expenses that are outside the divisional manager’s control.
A method for understanding the relationship between revenue, cost and sales volume.
analysis a procedure that examines
changes in costs and volume levels and the resulting
effects on net income (profits)
Total output of final goods and services produced within a country during a year.
Gross domestic product (GDP)
The market value of goods and services produced over time including the
income of foreign corporations and foreign residents working in the U.S., but excluding the income of U.S.
residents and corporations overseas.
Interest earned before taxes are deducted.
Revenues less the cost of goods sold.
Gross National Product
Total output of final goods and services produced by a country's citizens during a year.
Gross national product (GNP)
Measures and economy's total income. It is equal to GDP plus the income
abroad accruing to domestic residents minus income generated in domestic market accruing to non-residents.
The amount of earnings due to an employee prior to tax and other deductions.
The total sales recorded prior to sales discounts and returns.
The fraction of the gross proceeds of an underwritten securities offering that is paid as
compensation to the underwriters of the offering.
See operating profit.
Net profit margin
Net income divided by sales; the amount of each sales dollar left over after all expenses
have been paid.
See earnings before interest and income tax (EBIT).
Operating profit margin
The ratio of operating margin to net sales.
a temporary absorption costing profit caused
by producing more inventory than is sold
What’s left over after you subtract the cost of goods sold and all your expenses from sales.
The difference between income and expenses.
Profit and Loss account
A financial statement measuring the profit or loss of a business – income less expenses – for an accounting period.
profit and loss statement (P&L statement)
This is an alternative moniker
for an income statement or for an internal management profit report.
Actually, it’s a misnomer because a business has either a profit or a loss
for a period. Accordingly, it should be profit or loss statement, but the
term has caught on and undoubtedly will continue to be profit and loss
Profit before interest and taxes (PBIT)
a responsibility center in which managers are responsible for generating revenues and planning and controlling all expenses
An entity within a corporation against which both revenues and costs are
recorded. This results in a separate financial statement for each such entity, which
reveals a net profit or loss, as well as a return on any assets used by the entity.
A division or unit of an organization that is responsible for achieving profit targets.
Indicator of profitability. The ratio of earnings available to stockholders to net sales.
Determined by dividing net income by revenue for the same 12-month period. Result is shown as a
the ratio of income to sales
Profit Margin Ratio
A measure of how much profit is earned on each dollar of sales. It
is calculated by dividing the net income available for distribution to
shareholders by the total sales generated during the period.
This concept refers to a separate source of revenue and
profit within a business organization, which should be identified for
management analysis and control. A profit module may focus on one
product or a cluster of products. profit in this context is not the final, bottom-
line net income of the business as a whole. Rather, other measures
of profit are used for management analysis and decision-making purposes—
such as gross margin, contribution margin, or operating profit
(earnings before interest and income tax).
Ratios based on sales revenue for a period. A measure of
profit is divided by sales revenue to compute a profit ratio. For example,
gross margin is divided by sales revenue to compute the gross margin
profit ratio. Dividing bottom-line profit (net income) by sales revenue
gives the profit ratio that is generally called return on sales.
an incentive payment to employees that is
contingent on organizational or individual performance
Profit Sharing Plan
A retirement plan generally funded by a percentage of company
profits, but into which contributions can be made in the absence of profits.
a visual representation of the amount
of profit or loss associated with each level of sales
The present value of the future cash flows divided by the initial investment. Also called
the benefit-cost ratio.
See cash value added.
A method for determining the profitability of an investment. It is
calculated by dividing the present value of the future net cash flows
by the initial cash investment.
Ratio of net present value to initial investment.
profitability index (Pl)
a ratio that compares the present value of net cash flows to the present value of the net investment
Ratios that focus on the profitability of the firm. profit margins measure performance
with relation to sales. Rate of return ratios measure performance relative to some measure of size of the
pseudo microprofit center
a center for which a surrogate
of market value must be used to measure output revenue
real microprofit center
a center whose output has a market value
The amount of profit after deducting interest, taxation and dividends that is retained by the business.
A probability used to determine a "sure" expected value (sometimes called a
certainty equivalent) that would be equivalent to the actual risky expected value.
Well, frankly, accrual is not a good descriptive
term. Perhaps the best way to begin is to mention that accrual-basis
accounting is much more than cash-basis accounting. Recording only the
cash receipts and cash disbursement of a business would be grossly
inadequate. A business has many assets other than cash, as well as
many liabilities, that must be recorded. Measuring profit for a period as
the difference between cash inflows from sales and cash outflows for
expenses would be wrong, and in fact is not allowed for most businesses
by the income tax law. For management, income tax, and financial
reporting purposes, a business needs a comprehensive record-keeping
system—one that recognizes, records, and reports all the assets and liabilities
of a business. This all-inclusive scope of financial record keeping
is referred to as accrual-basis accounting. Accrual-basis accounting
records sales revenue when sales are made (though cash is received
before or after the sales) and records expenses when costs are incurred
(though cash is paid before or after expenses are recorded). Established
financial reporting standards require that profit for a period
must be recorded using accrual-basis accounting methods. Also, these
authoritative standards require that in reporting its financial condition a
business must use accrual-basis accounting.
The sales level at which a company, division, or product line makes a
profit of exactly zero, and is computed by dividing all fixed costs by the average
gross margin percentage.
Lease accounting used by a manufacturer who is also a lessor. Up-front gross
profit is recorded for the excess of the present value of the lease payments to be received across
a lease term over the cost to manufacture the leased equipment. Interest income also is recognized
on the lease receivable as it is earned over the lease term.
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