How to Determine Gross Margin on a Product Basis by Analyzing Financial Statements
There are three main financial statements. They are the income statement, the balance sheet and the cash flow statement. Each provides the investor or reader with a different set of information about the company. The income statement provides an overview of company sales and expenses. Gross margin is a measure of product profitability. It does not include administrative or operational shared costs. Those costs directly related to the product are referred to as the cost of goods sold on the income statement.
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Instructions
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Obtain the annual report. The annual report contains the most recent financial statements and can be requested through the investor relations department or downloaded from the company website.
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Turn to the income statement.
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Identify the values for sales and the cost of goods sold. The cost of goods sold are specifically related to product costs.
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Subtract the cost of goods sold from sales to calculate the gross profit. For example, assume sales are $100,000 and the cost of goods sold is $30,000. The calculation is $100,000 minus $30,000, or $70,000.
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Calculate gross margin by dividing gross profit by sales. In this example, the answer is $70,000 divided by $100,000, or 70 percent.
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