Using the Income Statement Flashcards

All 6 cards in this deck

What is the formula for gross profit margin?

(Gross profit ÷ revenue) × 100, given as a percentage. It shows how much gross profit is made for every £1 of sales revenue.

What is the formula for net profit margin?

(Net profit ÷ revenue) × 100, given as a percentage. It shows how much net profit is made for every £1 of sales revenue.

What are the steps to calculate gross profit margin from an income statement extract?
e.g. revenue £200, cost of goods sold £50

1. Revenue − cost of goods sold = gross profit: £200 − £50 = £150
2. (Gross profit ÷ revenue) × 100: (£150 ÷ £200) × 100 = 75%

What are the steps to calculate net profit margin from an income statement extract?
e.g. revenue £400, gross profit £200, total expenses £100

1. Gross profit − total expenses = net profit: £200 − £100 = £100
2. (Net profit ÷ revenue) × 100: (£100 ÷ £400) × 100 = 25%

What does a fall in gross profit margin suggest, even when sales revenue has risen?

Cost of sales has increased faster than the price charged to customers.

True or false? The only way to improve gross profit margin is to increase selling prices.

False. It can also be improved by reducing cost of sales, e.g. using a cheaper supplier of raw materials.