Reading Financial Reports For Dummies
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Gross margin looks at the profit margin based solely on sales and the cost of producing those sales. For financial reporting, it gives you a picture of how much revenue is left after subtracting all the direct costs of producing and selling the product. These costs can include discounts offered, returns, allowances, production costs, and purchases.

To calculate gross margin, divide gross profit by net sales or revenues:

Gross profit ÷ Net sales or revenues = Gross margin

You can find gross profit at the bottom of the sales or revenue section of the income statement. Net sales are at the top of the same section.

Using numbers from Mattel's income statement, you can calculate its gross margin:

$3,409,197 (Gross profit) ÷ $6,420,881 (Net sales) = 53.1% (Gross margin)

Mattel made a gross profit of 46.5 percent on each dollar of sales. Compare this number with Hasbro's gross margin (using numbers from its income statement). Hasbro doesn't show gross profit, so you must calculate it first by subtracting cost of goods sold ($1,671,980) from net revenues:

$2,417,003 (Gross profit) ÷ $4,088,983 (Net sales) = 59.1% (Gross margin)

Hasbro has about 6 percent more revenue left after it subtracts its direct costs than Mattel has, which shows that Hasbro has better cost controls on the purchase or production of the toys it's selling.

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About the book author:

Lita Epstein, who earned her MBA from Emory University’s Goizueta Business School, enjoys helping people develop good financial, investing and tax-planning skills.
While getting her MBA, Lita worked as a teaching assistant for the financial accounting department and ran the accounting lab. After completing her MBA, she managed finances for a small nonprofit organization and for the facilities management section of a large medical clinic.
She designs and teaches online courses on topics such as investing for retirement, getting ready for tax time and finance and investing for women. She’s written over 20 books including Reading Financial Reports For Dummies and Trading For Dummies.
Lita was the content director for a financial services Web site,, and managed the Web site, Investing for Women. As a Congressional press secretary, Lita gained firsthand knowledge about how to work within and around the Federal bureaucracy, which gives her great insight into how government programs work. In the past, Lita has been a daily newspaper reporter, magazine editor, and fundraiser for the international activities of former President Jimmy Carter through The Carter Center.

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