Accounting Principles: Gross Profit and Profit Margins

Accounting for Merchandising Operations

  • Reference material from Accounting Principles Tenth Canadian Edition by Weygandt, Kimmel, Mitchell, Warren, and Novak.

  • Focuses on Learning Objective 6: Calculating the gross profit margin and profit margin.

Profitability Ratios

  • Profitability ratios measure profit or operating success for a specific time period.

Gross Profit Margin

  • Defined as gross profit expressed as a percentage.

  • Measures the effectiveness of a company’s purchasing and pricing policies.

Profit Margin

  • The percentage of sales that results in profit.

  • Measures the ability of a company to cover all expenses and provide a return to owners.

  • Calculated using the formula:

Profit Margin=ProfitNet Sales\text{Profit Margin} = \frac{\text{Profit}}{\text{Net Sales}}