Analyzing the Income Statement Flashcards
A Change In Gross Profit Dollars can be caused by.
An increase or decrease in cost to make a unit
An increase or decrease in the price of the units
An increase or decrease in the volume of sales
Any combination of above.
Effects of Sales Volume on provit margin
A change in gross profit margin cannot be caused by and increase or decrease in sales volume.
Operating Expense Ratio
Total Operating Expense/Net Sales
Operating Profit
Operating Profit/Net Sales. Operating Profit is before interest expense.
Pretax Profit Margin
Pre tx profit margin expreses profti before intax as a percent of net sales. Does not include extraordinary items, discontinued operations, comprehensive income
Net Profit Margin
Includes profit before tax, less the tax provision, plus or minus any extraorinary itmes and any inomc o
Net Inocme
Measures the overall profitability of a company after all income and expense items have been acountined for.
Operating Leverage
The degree to which a company’s expenses are fixed expenses.
If sales volume drops fixed costs will represent a higher proportion of sales dollars and visa versa.
Mixed Costs
Costs that contain a varible and a fixed element. Need to be separated for a accurate measure of operating leverage.
Contribution Margin
Sales Less Variable Expense / Sales
Break-even Point
Fixed Expenses/Contribution Margin
Degree of Operting Leverage
Sales Less Total Variable Expenses/ Sales less Total Expenses
Degree Operating Leverage (DOL)
The higher fixed costs relative to variable costs the higher the DOL and the bigger the profit multiplyer
If a company’s DOL Declines over several years?
I could signal that the company is outgrowing its capacity. DOL will grow again when company invest in new plant and equipment.
A high DOL
Limits a company’s flexibility to respond to declines in sales.
