Multiple Choice
If XYZ Company has net sales of $500,000 and cost of goods sold of $320,000, the gross profit percentage is:
14. Financial Statement Analysis
Ratios: Gross Profit Rate
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A gross profit ratio of 55\% indicates that:
A
The company's operating expenses are 55\% of net sales.
B
The company pays 55\% of its sales as cost of goods sold.
C
For every dollar of net sales, the company earns $0.55 in gross profit.
D
The company retains 55\% of its net income after all expenses.
Verified step by step guidance1
Understand the concept of gross profit ratio: The gross profit ratio is calculated as (Gross Profit / Net Sales) × 100. It represents the percentage of net sales that remains after deducting the cost of goods sold (COGS).
Clarify the meaning of gross profit: Gross profit is the difference between net sales and the cost of goods sold. It does not account for operating expenses, taxes, or other costs.
Interpret the gross profit ratio of 55%: A gross profit ratio of 55% means that for every dollar of net sales, $0.55 is retained as gross profit, and the remaining $0.45 is used to cover the cost of goods sold.
Eliminate incorrect interpretations: The gross profit ratio does not indicate operating expenses, net income retention, or the percentage paid as COGS. It specifically measures the proportion of net sales retained as gross profit.
Conclude the correct interpretation: The correct understanding is that for every dollar of net sales, the company earns $0.55 in gross profit, which is the amount available to cover operating expenses, taxes, and other costs.
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