 Hello in this lecture, we're going to define gross profit ratio According to fundamental accounting principles while 22nd edition the definition of a gross profit ratio is Also called gross margin ratio gross profit net sales minus cost of goods sold Divided by net sales. So we are talking about a ratio here And it can be termed gross profit ratio or gross prop gross margin ratio And what we're taking is the gross profit calculated as net sales minus cost of goods sold Divided by the net sales remember that that term net sales does not mean net income We're really just talking about the sales number in a multi-step Income statement the end sales number which is the sales minus the contra sales accounts the sales returns and allowance and the discounts Let's take a look at an example We could have the sales here and again, that's going to be net sales represented here sales minus returns and allowance at 100,000 minus the cost of goods sold the cost of the inventory 75,000 giving us a gross profit at the top of the multi-step income statement that subcategory 25,000 very important number we could then take the gross profit ratio By taking that gross profit and dividing it by the sales or net sales If we took the numbers then we're saying we're taking the 25,000 divided by the 100,000 calculating that out to be point two five or 25 percent that means that for every dollar sale we have we're basically keeping 25 cents on the dollar after just the cost of goods sold Often represented by putting the 25 percent next to the gross profit and to put that into context if we took 100 percent of the sales 100,000 divided by the 100,000 We get a hundred percent and if we took the 75,000 compared it to sales We would then get 75,000 divided by 100,000 75 percent and we can see that of course the hundred percent of the sales minus the 75 percent the amount of The sales that's basically being used up through the cost of the inventory is what we're left with in terms of the gross profit percent the gross profit ratio