How is gross profit calculated?

Gross profit is calculated by subtracting the cost of goods sold (COGS) from total revenue. This measurement reflects the efficiency with which a company uses its resources to produce and sell its products. COGS includes all the direct costs associated with the production of goods sold by the company, such as materials and labor directly tied to the manufacturing of those goods.

Calculating gross profit helps businesses understand how much money is left over from sales after accounting for the costs involved in making and selling products. This figure is crucial for assessing the profitability of a company's core operational activities, supporting decisions related to pricing, production, and overall business strategy.

Other options do not appropriately define gross profit. The first option incorrectly suggests subtracting total expenses, which include operating expenses, taxes, and interest, leading to net profit rather than gross profit. The third option suggests adding COGS to revenue, which is not a standard calculation method and does not provide meaningful information about profitability. Finally, the last option relates to the balance sheet calculation of equity and is unrelated to the income statement or gross profit calculation.