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Chapter 5: Q5-23RQ (page 294)

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

Short Answer

Expert verified

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

Step by step solution

01

Meaning of Gross Profit

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

02

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 itsoperating expenses.

The gross profit percentage is computed as follows:

Gross profit percentage=Sales revenue-Cost of goods soldSales revenue×100

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Most popular questions from this chapter

What are the two types of inventory accounting systems? Briefly describe each.

Comparing periodic and perpetual inventory systems

For each statement below, identify whether the statement applies to the periodic inventory system, the perpetual inventory system, or both.

a. Normally used for relatively inexpensive goods.

b. Keeps a running computerized record of merchandise inventory.

c. Achieves better control over merchandise inventory.

d. Requires a physical count of inventory to determine the quantities on hand.

e. Uses bar codes to keep up-to-the-minute records of inventory.

What is freight out and how is it recorded by the seller?

Macarthy Landscape Supply’s selected accounts as of December 31, 2018, follow. Compute the gross profit percentage for 2018.

Selling Expenses $ 12,900

Interest Revenue 900

Net Sales Revenue 134,700

Cost of Goods Sold 114,000

Administrative Expenses 10,200

Journalize the following sales transactions for Morris Supply. Explanations are not required.

Mar. 1 Morris Supply sold merchandise inventory for \(3,000. The cost of the inventory was \)1,800. The customer paid cash. Morris Supply was running a promotion, and the customer received a \(150 award at the time of sale that can be used at a future date on any Morris Supply merchandise.

3 Sold \)6,000 of supplies on account. Credit terms are 2/10, n/45, FOB destination. The cost of goods is \(3,600.

10 Received payment from the customer on the amount due from March 3, less the discount.

Apr. 15 The customer used the \)150 award when purchasing merchandise inventory for \(200; the inventory cost was \)120. The customer paid cash.
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