How is gross profit calculated?

• A. Net Sales plus Cost of Goods Sold
• B. Net Sales minus Cost of Goods Sold
• C. Gross Profit equals Total Revenue minus Operating Expenses
• D. Gross Profit equals Net Income minus Taxes

Answer: (B)

Gross profit shows how much money remains from selling goods after covering the direct costs of those goods. It is calculated by subtracting the cost of goods sold from net sales. Net sales are the revenue from sales after accounting for returns, allowances, and discounts, while cost of goods sold includes the direct costs tied to producing or purchasing the goods that were sold (materials, direct labor, and allocated overhead). So, gross profit = net sales minus cost of goods sold.

For example, if net sales are $500,000 and COGS is $300,000, gross profit is $200,000. This figure reflects the margin available to cover other expenses like operating costs, taxes, and interest.

The other options don’t fit because one adds COGS to net sales which overstates revenue, another subtracts operating expenses from total revenue which yields operating income, and another subtracts taxes from net income which yields net income.