COMPUTATION

OF GROSS
PROFIT
Soriano, Angel Jianne A.
Dedicatoria, Arianne B.
OBJECTIVES
Identify essential components in computing revenues
and costs;
Differentiate between gross profit, operating profit and
net profit.
Interpret financial ratios such as the gross profit rate,
operating profit margin and net profit margin.
Compute actual revenues;
Compute actual costs;
Compute gross profit, operating profit and net profit.
OBJECTIVES
Compute the gross profit rate, operating profit margin
and net profit margin.
Create profit schedules and reports;
Appreciate the importance of keeping track with the
performance of one’s business through the correct and
honest computation and reporting of business profit.
Appreciate the importance of the correct computation
and interpretation of financial ratios gross profit rate,
operating profit margin and net profit margin.
 WHAT IS PROFIT?
Profit is a financial gain from a transaction or from a period of
investment or business activity.
It is a total revenue minus total expenses, profit is the amount of
money a business "makes" during a given accounting period. The
more profit you make, the better.
To accurately determine your business's profit is an essential part
of being able to judge its financial health. It can also help you
decide how to price your goods and services, how to pay your
employees, and more.
 LET'S TRY!
Let's say that we own a small publishing business. In the
last month, we sold P20,000 worth of books to retailers
in the area. However, we also sold the rights to one of
our intellectual properties for P7,000 and received
P3,000 from book retailers for official promotional
materials. If these represent all of our revenue sources,
we can say that our total income is:
P20,000 + P7,000 + P3,000 =
PROFITABILITY
RATIOS
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 PROFITABILITY RATIO
The profitability ratios are a group
of financial statement that
primarily determines the
profitability of the business
operation.
 PROFITABILITY RATIO

They provide information

on the efficiency of
resource utilization.
GROSS
PROFIT
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 GROSS PROFIT
The gross profit represents the
difference between net sales and
cost of sales of the entrepreneurial
venture during a given period.
 GROSS PROFIT
The amount of gross profit provides
information to the entrepreneur about
revenue earned from sales.
Cost refers to the purchase price of the
product including the total outlay
required in producing it.
GROSS PROFIT
FORMULA
LET'S TRY!

Net Sales : Php. 734, 000.00

Cost of Sales : Php. 577, 000.00

LET'S TRY!
Cost of Sales :
Net Sales : Php. 734, 000.00
Php. 577, 000.00

Answer:
 GROSS PROFIT RATE
The gross profit rate measures the
percentage of gross profit to sales,
indicating the profit that the
business realizes from the sale of
the product.
GROSS PROFIT RATE
FORMULA
LET'S TRY!

Gross Profit :
Php. 157, 000.00

Net Sales : Php. 734, 000.00

LET'S TRY!
Gross Profit :
Net Sales : Php. 734, 000.00
Php. 157, 000.00

Answer:
The gross profit rate may signal to the entrepreneur that the
amount of margin on sales is 21.39%. This rate will be used to
determine whether the amount of gross profit can cover the
operating of the business. Since the gross profit rate of SVT Trading
is 21.39%, the cost ratio to sales will be 78.61%. This information will
help the entrepreneur in assessing whether the cost is too high or too
low. Any product with a very high cost will not become competitive in
the market.
The gross profit rate will also help the entrepreneur set the selling
price.
OPERATING
PROFIT
MARGIN
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OPERATING PROFIT MARGIN

The operating profit margin

is the excess of gross profit
from operating expenses.
 OPERATING PROFIT MARGIN
• The operating profit margin is the second level of revenue
in the income statement.
• At this stage, not only the cost of buying or making the
product that has been deducted is included but also the
operating expenses.
• These are expenses incurred during a particular period
only, and are not expected to provide benefits to any future
period. The operating expenses are also period costs.
OPERATING PROFIT
MARGIN FORMULA
LET'S TRY!
Gross Profit : Php. 157, 000.00

Operating Expenses :
Php. 90, 000.00
LET'S TRY!
Net Sales : Php. 734, 000.00 Cost of Sales : Php. 577, 000.00

Answer:
OPERATING PROFIT MARGIN RATE

The operating profit margin of the

business measures the percentage
of profit available after deducting
the cost of sales & operating
expenses of the business.
OPERATING PROFIT MARGIN RATE
A higher operating profit margin is
favorable to the business. The larger
the ratio, the more money your
company makes on each peso of
sales.
OPERATING PROFIT
MARGIN RATE FORMULA
LET'S TRY!
OPERATING PROFIT MARGIN :
Php. 67, 000.00

Net Sales : Php. 734, 000.00

LET'S TRY!
OPERATING PROFIT MARGIN :
Net Sales : Php. 734, 000.00
Php. 67, 000.00

Answer:
REMEMBER!
The operating profit margin of the business
measures the percentage of profit available
after deducting the cost of sales &
operating expenses of the business. A higher
operating profit margin is favorable to the
business
NET PROFIT
MARGIN

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 NET PROFIT MARGIN
The net profit margin is the third
level of revenue in the income
statement. The business is only
given consideration like interest
expense and income tax.
NET PROFIT MARGIN FORMULA
LET'S TRY!
Operating Profit Margin :
Php. 67, 000.00

Income Tax: Php. 20, 000.00

LET'S TRY!
Operating Profit Margin : Php. Income Tax:
67, 000.00 Php. 20, 000.00

Answer:

P46,000.00
 NET PROFIT MARGIN RATE
Net profit margin helps investors assess if a
company's management is generating enough
profit from its sales and whether operating costs
and overhead costs are under control.
Net profit margin is one of the most important
indicators of a company's overall financial health.
NET PROFIT MARGIN
RATE FORMULA
LET'S TRY!
Net Sales : Php. 734, 000.00

Net Profit : Php. 577, 000.00

LET'S TRY!
Net Profit :
Net Sales : Php. 734, 000.00
Php. 577, 000.00

Answer:
SVT TRADING APPEARS TO HAVE
EARNED 6.39% OF ITS TOTAL
SALES OF P734,000 DURING THE
YEAR. THIS PROFITS RATE MUST
BE COMPARED WITH THOSE OF
OTHER SIMILAR BUSINESSES
WITHIN THE INDUSTRY.
ANALYSE THE
LIQUIDITY
STATUS OF
THE BUSINESS
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 LIQUIDITY RATIOS
Determine a company's
ability to cover short term
obligations and cash flow.
Current Ratios
Quick Ratios
 CURRENT RATIOS
aka Working Capital Ratio, is one
way to assess the overall liquidity
of a company by comparing
current assets to current liabilities.
CURRENT RATIO
FORMULA
LET'S TRY!
Current Asset :
P2,421,678

Current Liabilities :
P1,766,108
LET'S TRY!
Current Asset : Current Liabilities :
P2,421,678 P1,766,108
 QUICK RATIOS
aka Acid Test Ratio, the quick ratio
is more conservative in the sense
that it does not include all current
asset in the computation.
QUICK RATIO
FORMULA
LET'S TRY!

Quick Asset :
P684,203

Current Liabilities :
P1,766,108
LET'S TRY!
Quick Asset : Current Liabilities :
P684,203 P1,766,108
Financial statements are important in a
company management as a means of
communicating past successes as well as
future expectations. The financial statement
records all the operating results such as
sales, expenses and profits or losses.
RETURN OF INVESTMENT
The Return of investment (ROI)
measures the amount of net
income per peso Invested to the
business.
RETURN OF
INVESTMENT FORMULA
Yearly increase in revenue is assumed at 5%
Yearly increase in cost is assumed at 5%
REMEMBER
As a future entrepreneur, one should always
remember that nothing is permanent in the field
of entrepreneurship.
Entrepreneurship should be practiced not as a
science but as an art.
The important in entrepreneurship is that the
business activities are performed correctly.
THANK
YOU