Gross margin

Definition

Gross margin is the difference between sales revenue and the cost of goods sold (COGS). It measures how efficiently a company produces and sells its products.

5 Must Know Facts For Your Next Test

1. Gross margin is calculated by subtracting COGS from net sales.
2. The gross margin percentage is found by dividing gross margin by net sales and multiplying by 100.
3. A higher gross margin indicates better efficiency in managing production costs relative to sales.
4. Gross margin appears on a multi-step income statement but not on a simple income statement.
5. Changes in inventory valuation methods can affect the reported gross margin.

Review Questions

• How do you calculate the gross margin percentage?
• Why would a higher gross margin be favorable for a company?
• What impact can different inventory valuation methods have on gross margin?

Related terms

Net Sales:

Total revenue from goods sold minus returns, allowances, and discounts

Cost of Goods Sold (COGS): Direct costs attributable to the production of goods sold by a company

Multi-Step Income Statement:

An income statement that separates operating revenues and expenses from non-operating ones