Question

What does gross profit represent? [NOT the calculation, but rather what does it “mean”…] Given this, how would gross profit (also known as gross margin) be computed for a service organization?

What might it mean to have a decline in unearned revenues in the current year if the company is a magazine publisher?

Explain why the amount of retained earnings reported on the balance sheet is often not the net amount of all accumulated earnings (and losses) less all accumulated cash and property dividends.

When would airlines recognize revenue from the sale of a plane ticket today for a flight in June 2018? Does it matter whether or not the customer holds a frequent-flyer number?

Answer 1

* Gross Profit is the profit any business makes when all the expenses associated with running the business, manufacturing and selling the product are deducted from the revenues. It reflects the core profitability of the company. Gross profits are the profits obtained before operating expenses, interest and taxes are subtracted.

Formula for Gross Profit = Sales Revenues – Cost of Goods Sold

* Gross profit margins for service firms are a bit difficult to determine and the factors to be considered for service firms are:

Direct costs include salaries, sales commissions, indirect costs include insurance, employee training, shipping costs, direct labor, sales commissions.

Total Revenues – Direct costs – indirect costs = Gross Margin

* Decline in unearned revenue might mean that the services have now been performed and the revenues have become due and earlier unearned revenue was credited and now will be debited. The other meaning could be that the order has been canceled and the advance taken earlier has been returned to the customer.

* The amount of retained earnings reported on the balance sheet is often not the net amount of all accumulated earnings (and losses) less all accumulated cash and property dividends because a company which is in growth or diversifying stage is often in need of cash and wants to keep the funds rather than distributing them as dividends and hence to calculate retained earnings all accumulated dividends are not subtracted from it. If the company pays some dividends those will be recorded but not all.

* The revenue will be recognized when actual goods or services are transferred in future to the customer.

* To get the benefits of Frequent flyer program, one has to take frequent-flyer number which can be used to get points from shopping also.