How is gross profit calculated?

• A. Net Sales minus COGS
• B. Net Sales plus COGS
• C. Gross Revenue minus expenses
• D. Net Income plus taxes

Answer: (A)

Gross profit shows how much you have left from selling goods after paying for the costs directly tied to those goods. The way to get it is to subtract the cost of goods sold from net sales. Net sales reflect money earned from sales after returns, allowances, and discounts, while cost of goods sold covers materials, labor, and overhead directly involved in producing the goods sold.

For example, if net sales are 500,000 and COGS is 300,000, gross profit is 200,000. This figure focuses on the profitability of the core product, before operating expenses, taxes, and other costs are taken into account.

Other approaches don’t measure gross profitability of goods. Adding COGS to net sales would inflate revenue, and subtracting expenses from gross revenue mixes operating costs into what should be a gross measure. Net income plus taxes wouldn’t reflect the lighter, product-level profitability since it includes all expenses and taxes.