Gross Profit

Learning Outcomes

  • Define gross profit and gross profit percentage

Gross profit is also called gross margin and sometimes profit margin. Just for the sake of consistency, we’ll call it gross profit. It’s not an account; it’s a calculation that appears on the income statement:

[latex]\text{Sales Revenue}-\text{Cost of Goods Sold}=\text{Gross Profit}[/latex]

We’ll talk about the rest of the multiple-step income statement at the end of Module 8. For now, we can use our earlier example of baseball bats to illustrate this simple calculation.

Sales Revenue $ 15
Cost of Goods Sold $ 10
Gross Profit $  5

And the gross profit percent is simple [latex]\dfrac{\text{Gross Profit}}{\text{Sales Revenue}}[/latex].

In this case, [latex]\frac{5}{15}[/latex], which is [latex]\frac{1}{3}[/latex], or .3333, or 33.33%.

Here are just the top three lines from Home Depot, Inc.’s annual report for 2019:

in millions, except per share data Fiscal 2019 Fiscal 2018 Fiscal 2017
Net sales $     110,225 $     108,203 $     100,904
Cost of sales 72,653 71,043 66,548
          Gross Profit Single line
Double line
Single line
Double line
Single line
Double line

Note that the gross profit percent for each year is as follows:

Home Depot Gross Profit %
2019 2018 2017
34.09% 34.34% 34.05%

It’s pretty consistent and tells you that for every dollar in sales the company makes, on average, it clears about $0.34 (34 cents) that then goes to pay all the other costs, like overhead on the building, and taxes, and employee wages.

Note that for the 2019 fiscal year (that actually ended on February 2, 2020—but we’ll discuss that in a later module) the revenues were over $110 billion. ($110,225,000,000 which has been rounded to the nearest million).

Next, we’ll look more closely at the differences and similarities between the periodic system of recording cost of goods sold and the perpetual method.

Practice Questions