Definition
The financial accounting term gross profit is used to describe a subtotal line item appearing on the income statement. Gross profit is the money left over after the cost of goods sold (COGS) is subtracted from revenues.
Calculation
Gross Profit = Revenues - Cost of Goods Sold
Explanation
Also known as gross margin, gross profit is a measure of a company's ability to earn money from ongoing operations. It's a value that is frequently used to measure the efficiency of a company. For example, gross profit is a key variable used in the gross profit margin calculation.
Gross profit removes the cost of goods sold from revenues. As such, the value tells the analyst or investor how much money is left over after the cost to make the product or supply the service is removed. Expenses such as direct labor and raw materials are included in the cost of goods sold.
Example
Company A's income statement indicates total revenues of $29,611,000 and cost of revenues (another name for COGS) of $15,693,000. The gross margin for Company A would then be:
= $29,611,000 - $15,693,000, or $13,918,000
Related Terms
The income statement is a financial accounting report that demonstrates how net income, or profit, is derived from revenues. The main categories appearing on an income statement include revenues, cost of goods sold, operating expenses, non-recurring items and net income.
Moneyzine EditorJanuary 22nd, 2024- The financial accounting term revenue is used to describe the price charged to customers for good sold, or services rendered. Revenues are reported on a company's income statement.Moneyzine EditorSeptember 21st, 2023
The direct expense a company incurs when making a product, or supplying a service, such as raw materials and labor are referred to as the cost of goods sold (COGS). Also referred to as the cost of sales, the cost of goods sold appears as a line item expense on the income statement.Moneyzine EditorJanuary 12th, 2024
The gross profit index is an operating performance measure that allows analysts to understand if the gross profit margin is changing significantly over time. When the gross profit index varies considerably from 1.0, it may indicate irregularities in the reporting of profits.Moneyzine EditorJanuary 19th, 2024
