PROFIT.pptx

Profitability Ratios

• Profitability ratios are financial metrics that determine the profitability of business operations.

Calculating Gross Profit

• Gross Profit Calculation:

  • Net Sales: XXXXXXX

  • Less: Cost of Sales: XXXXXXX

  • Gross Profit: XXXXXXX

Understanding Profit

• Profit Definition:

  • Profit is identified as the gross income.

  • Gross profit informs entrepreneurs about revenue earned from sales.

  • Cost Definition:

    • Refers to the purchase price of the product.

    • Includes total outlay required in the production process.

Gross Profit Margin

• Calculation:

  • Gross Profit Rate = (Gross Profit X 100) / Net Sales

  • Indicates the profit percentage that the business realizes from product sales

Setting Selling Prices with Gross Profit Rate

• The gross profit rate assists in determining the selling price of products.

Operating Profit Margin Rate

• Definition:

  • Excess of gross profit over operating expenses.

• Operating Profit Calculation:

  • Gross Profit: XXXXX

  • Less: Operating Expenses: XXXXX

  • Operating Profit Margin: XXXXX

• Represents second level revenue in the income statement.

• Includes deductions from both costs of product and operating expenses, which are current period costs.

Income Realized

• States realization of an income of P 67,000.00 after deducting costs and operating expenses from sales.

• Operating Profit Margin Rate Calculation:

  • Operating Profit Margin Rate = (Operating Profit Margin X 100) / Net Sales

Operating Profit Margin Rate Example

• Calculation:

  • Operating Profit Margin Rate = (67,000.00 X 100) / 734,000.00 = 0.09128 X 100

  • Result: 9.13%

Importance of Operating Profit Margin

• Measures profit percentage after deducting operating expenses.

• High Operating Profit Margin is favorable for business operations.

Net Profit Margin Rate

• Net Profit Margin Rate Calculation:

  • Calculation:

    • Net Profit Margin Rate = (Net Profit X 100) / Net Sales

    • = (46,900.00 X 100) / 734,000.00 = 0.06389 X 100

    • Result: 6.39%

Importance of Financial Statements

• Financial statements are vital for management for communicating:

  • Past successes.

  • Future expectations.

• Records operating results, including sales, expenses, and profits/losses.