Question

What is gross profit?

1) Sales less operating expenses
2) Net sales less cost of goods sold
3) Sales plus cost of goods sold
4) Net income less cost of goods sold

Answer 1

Gross profit is defined as net sales less cost of goods sold, and it indicates the efficiency of a company's production and initial profitability before subtracting operating expenses, taxes, and other costs.

Step-by-step explanation:

Gross profit is calculated by taking net sales and subtracting the cost of goods sold (COGS). Therefore, the correct option for the definition of gross profit is: 2) Net sales less cost of goods sold. This is an important financial metric for businesses as it indicates how efficiently a company uses labor and supplies in production and serves as a gauge for the company's profitability.

Gross profit should not be confused with net income or accounting profit, which is calculated by subtracting all of a company's expenses, including operating expenses and taxes, from its total revenue. Economic profit, on the other hand, takes into account both explicit costs (like wages and materials) and implicit costs (such as opportunity costs).