How is Gross Profit calculated?

Gross Profit is calculated by subtracting the Cost of Goods Sold (COGS) from Revenue (or Net Sales). This formula reflects the amount of money a company makes from its core business activities before accounting for other expenses such as operating expenses, taxes, and interest.

The correct calculation focuses specifically on the direct costs associated with producing the goods or services sold, which COGS represents. The resulting figure, Gross Profit, provides insights into how efficiently a company is producing its goods and is a critical component of financial analysis.

This measure is crucial for assessing profitability and operational efficiency, as it illustrates how much revenue a company retains to cover its indirect costs and ultimately reach a profit. Understanding this calculation is fundamental for anyone studying accounting or finance, as it sets the stage for deeper financial analysis and decision-making within a business setting.