8. Analysis of the Income Statement

j. convert income statements to common-size income statements;

## k. evaluate a company’s financial performance using common-size income statements and financial ratios based on the income statement;

What is net profit margin and what is the calculation? - Net Profit Margin shows how much profit is generated on every dollar of sales. - \(net\ profit\ margin = \frac{net\ income}{revenue}\)

What is net income? Net income is earnings after tax but before dividends (EBIT - interest - taxes).

What is gross profit margin and what is the calculation? - Gross Profit Margin equals percent of sales available after deducting cost of goods sold. - \(gross\ profit\ margin = \frac{gross\ profit}{revenue}\)

Where does the gross profit margin exist on the income statement? What is it’s purpose? It is in the middle of the income statement - this percentage is available to cover selling, general and administrative costs, and also earn a profit. It indicates the basic cost structure of a company and shows the company’s cost-price position.