From the original Beneish paper

GMI is ratio of the gross margin in year t-1 to the gross margin in year t. When GMI is greater than 1, it indicates that gross margins have deteriorated. Lev and Thiagarajan(1993) suggest that gross margin deterioration is a negative signal about firms' prospects. If firms with poorer prospects are more likely to engage in earnings manipulation, I expect a positive relation between GMI and the probability of earnings manipulation.

Beneish Formula

((Sales{t-1} - Cost of Goods Sold{t-1}) /Sales{t-1}) /
((Sales{t} - Cost of Goods Sold{t}) /Sales{t})

Our Formula

((GrossProfitPTM/SalesPTM)-(GrossProfitTTM/SalesTTM)) /
abs(GrossProfitTTM/SalesTTM))+1)

NOTE1: If GrossProfit during preliminary reporting are N/A , the whole formula excludes the latest period

NOTE2:To accommodate the possibility of negative gross margins, we use the (a-b)/abs(b) format. To stay consistent, we use the (a-b)/abs(b) approach across the board. But when we do this, we'll get a straightforward percent (expressed in decimal form). For example if we measure the percent change from 10 to 13, our formula will produce an answer of 0.30. However, the a/b approach Beneish used would produce the figure 1.30. We need the latter for use in the overall MScore equation; to multiply the GMI value by the appropriate coefficient. Accordingly, the formula we use to compute GMI is: ((a-b)/abs(b))+1 where a represents values for the t-1 period and b represents values for the t period.

Related Factors:

BeneishMScore MScoreAQI MScoreDEPAMI MScoreDEPI MScoreDSRI MScoreGMI MScoreLVGI MScoreSGAI MScoreSGAI MScoreTATA