 Hello, in this lecture we're going to define gross margin ratio. According to fundamental accounting principles, while 22nd edition, the definition of gross margin ratio is also called gross profit ratio, gross margin net sales minus cost of goods sold divided by net sales. So what we're talking about is a term gross margin ratio that also can be described as the gross profit ratio. It's going to be a calculation. It's going to be a ratio that ratio being net sales minus cost of goods sold, which is equivalent to the gross margin also called the gross profit divided by the net sales. So we're taking the gross margin number dividing it by net sales. Remember that net sales does not mean net income. We're talking about net sales, basically the sales number, meaning revenue minus the contra sales accounts, sales allowance, and discounts. So if we did a calculation, we'd say sales. And again, that means net sales. This is the total sales number in the sales section of an income statement minus the cost of goods sold. That would give us that gross margin number. In this case, 25,000 number that's typically on the top of a multi step income statement. Then if we want to have the percentage gross margin ratio, we would then take the gross margin, divide that by the sales number, the revenue number. And in this case, that would be 25,000 divided by the sales number of 100,000. 25,000 divided by 100,000 would give us 0.25. Move the decimal place over to places and add a percent sign gives us 25%. So that means that for every dollar, we're getting basically 25 cents on every dollar sale after cost of goods sold. We often represent that we could represent that by saying here's the 25% ratio, the gross margin ratio here. And we can compare that to if we take sales over sales, obviously that would be 100% cost of goods sold 75,000 over sales 100,000 would be 75. So that means that for every dollar sales were basically have the cost of the inventory at 75 cents, leaving us with the 100 minus the 75 or 25%. That's another way we can take a look at the gross margin ratio.