Unit 2: Profitability and Per-Share Ratios Flashcards
Define gross profit margin.
Gross profit margin is the percentage of gross revenues that remains with the firm after paying for merchandise.
How is the gross profit margin percentage calculated?
Gross profit margin percentage = (Net sales – Cost of goods sold) ÷ Net sales
What is operating profit margin?
Operating profit margin is the percentage that remains after selling and general and administrative expenses have been paid. It is calculated as operating income divided by net sales.
How is the return on assets calculated?
Return on assets = Net income ÷ Average total assets
What is the formula for the return on equity?
Return on equity = Net income ÷ Average total equity
How is return on assets calculated under the DuPont model?
DuPont ROA
Net income ÷ Average total assets
=
(Net income ÷ Net sales) × (Net sales ÷ Average total assets)
How is return on equity calculated under the DuPont model?
(Net income ÷ Net sales) × (Net sales ÷ Average total assets) × (Average total assets ÷ Average total equity)
Factors involved in measuring profitability include
The definition of income
The stability, sources, and trends of revenue
Revenue relationships
Expenses
What are the five steps for recognizing revenue from contracts with customers?
Step 1: Identify the contract(s) with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognize revenue when (as) a performance obligation is satisfied
How is a change in accounting principle accounted for?
Retrospective application, if practicable, is required for all direct effects and the related income tax effects of a change in accounting principle.
How is a change in accounting estimate accounted for?
The effects of a change in accounting estimate should be accounted for prospectively, that is, only in the period of change and any future periods affected. Retrospective application means that the balances of previous years are changed.
How is the correction of a prior period accounting error presented in the financial statements?
An accounting error related to a prior period is reported as a prior-period adjustment by restating the prior-period statements
Define simple capital structure.
A simple capital structure is one in which the firm has only common stock and does not have any dilutive potential common stock.
What is the formula for earnings per share (EPS)?
EPS = Net income available to common shareholders ÷ Weighted-average common shares outstanding
How is book value per share calculated?
Book value per share
(Total stockholders’ equity – Preferred equity) ÷ Number of common shares outstanding
