Using gross profit margin to analyze profitability

Gross profit margin measures the proportion of profit yielded by sales. To calculate this ratio, divide gross profit by sales revenue: Gross profit margin = Gross profit⁄Sales revenue It is also knows as gross profit ratio or percentage. Calculating gross profit margin For the year ended April 2, 2016, Michael Kors Holdings Ltd. had gross profit of $2,797.2 million […]
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What are current assets?

Current assets are assets deemed to be liquid enough to be converted to cash within one year or less. The balance sheet reports current assets above noncurrent assets. Types Current assets include: Cash and cash equivalents Short-term investments Accounts receivable Merchandise inventory Prepaid assets Understanding liquidity Liquidity is defined as how easily an asset can be […]
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What are noncurrent assets?

Noncurrent assets are assets that are not deemed to be liquid enough to be converted to cash within one year or less. They are listed in the balance sheet below current assets. Types of noncurrent assets Property, plant, and equipment Long-term investments Goodwill Copyrights, trademarks, and other intangible assets Noncurrent assets and operating cycles Noncurrent assets […]
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Computing and interpreting inventory turnover

Inventory turnover measures how productively a company uses its merchandise inventory to generate sales and profits. Calculating inventory turnover Here is the formula for inventory turnover: Inventory turnover = Cost of goods sold⁄Average inventory Cost of goods sold measures the amount paid to purchase or manufacture items that were sold during the period. To find cost […]
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Accounting for merchandise inventory

Inventory, also called merchandise inventory, is the company’s investment in products that it plans to sell to customers. It is an asset recorded on the balance sheet along with other current assets. Manufacturers make their own inventory, while retailers and other businesses buy their inventory from suppliers. Recording inventory Under U.S. Generally Accepted Accounting Principles, companies usually […]
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Managing Materiality

Accounting information is material if its omission or misstatement would mislead investors. In other words, if there’s a piece of information that investors need to know, then that information is material – it makes a difference. Information can be material in size or importance. In size, materiality is all about the amount. A large amount of […]
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Understanding confirmatory value

In accounting, information has confirmatory value when it helps users to confirm or adjust prior expectations. But why is confirmatory value an important attribute for accounting information to have? The importance of confirmatory value People read accounting financial statements in order to create predictions about the future. They want to predict future dividends and that the company […]
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Relevance in accounting

Accounting information is relevant (“accounting relevance”) when it is capable of making a difference in a decision. Suppose that you’re trying to decide what to eat for dinner: A hamburger? Or a salad? What information is relevant to your decision? The price of each meal, perhaps. And consider the number of calories, too. Do you have […]
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