How is gross profit calculated?

Gross profit is calculated by subtracting the cost of goods sold (COGS) from total revenue. This calculation focuses specifically on the direct costs associated with producing goods that a company sells, which includes expenses directly tied to the production of those goods, such as materials and labor. The formula reflects the core profitability of a company's sales transactions before accounting for operating expenses, taxes, or net income.

This distinction is essential in financial management, as it helps analysts and business owners understand how efficiently a company is producing and selling its products, providing insight into pricing strategies and cost control measures. Understanding gross profit is crucial for assessing overall business health and operational efficiency, which is a fundamental aspect of financial management practices.