The gross profit profit indicator is a working performance measure which makes it possible for analysts to comprehend in the event the gross profit margin is slowly shifting somewhat as time passes. Once the gross profit indicator fluctuates considerably from 1.0, it can signify irregularities in the coverage of profits.
Gross Profit Index = Gross Profit Margin in Period 2 / Gross Profit Margin in Period 1
- Gross Profit Margin = Gross Profits / Sales
Operating performance measures permit the investor-analyst to comprehend how well an organization is performing depending on earnings, gross profits, and profits. The gross profit profit indicator aids the analyst to find substantial variations in a business ‘s gross profit margin with time. The indicator normalizes the present stage ‘s gross profit gross profit by dividing by the value seen in the former period.
Since the gross profit margin needs to remain quite stable from time to period, the analyst should hope the indicator to stay near 1.0. After the index fluctuates somewhat in 1.0, then this could possibly be a symptom of deceptive reporting action or a mistake from the last or present period.
After reporting remarkably substantial gross profits at the present time ‘s draft financial announcement, Company A’s CFO arranged their internal auditing department to rapidly compare the draft income announcement together with all those of their last period. One of those testing tests that the internal auditors ran was that the improvement of this gross profit indicator. The outcomes of the investigation appear in the table beneath:
|Current Year||Prior Year|
|Less: Sales Allowances and Returns||$1,256,000||$656,000|
|Less: Cost of Goods Sold||$5,536,000||$5,784,000|
|Gross Profit Margin||$2,982,000||$3,773,000|
|Gross Profit Margin (percent )||30.5percent||36.9percent|
|Gross Profit Index||0.83|
The internal auditors found that the gross profit indicator varied somewhat from 1.0, suggesting an issue at the existing phase ‘s draft income announcement. Following the finding, the auditors discovered a clerical error leading to the overstatement of earnings adjustments and yields.