Business, Legal & Accounting Glossary
Sales minus cost of sales before deducting administration and selling expenses (see also gross margin).
Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. Gross profit appears on a company’s income statement and is calculated by subtracting the cost of goods sold (COGS) from revenue (sales).
Gross profit is expressed in dollars and is the amount of profit a company has left after deducting all expenses directly related to a sale. These expenses include the cost to buy/produce the product/service sold, transportation costs to get it to a store, etc. It does not include corporate overhead, advertising, interest costs, etc.
This is how much money the company makes directly from selling its goods or services. It is the amount of “markup” above the cost of buying or making those products or services. So if you hear “100% markup” then you can quickly calculate the gross profit as half the sale price. (For those who think that one went by too quickly, a 100% markup means that the company is selling the product for twice what it cost it. So out of the total selling price, COGS is half and gross profit is half.)
Remember, out of gross profit, all the other expenses of the company have to be paid. This includes things like lighting and rent and executive salaries. It also includes research and development and other operating expenses, as well as taxes and interest owed on any debt. So, don’t be surprised at the seemingly large number relative to revenue. The company isn’t fleecing its customers (so we hope) but is setting the price high enough and earning enough gross profit to support itself and still have some leftover (net profit).
On the income statement, this is the first (nearest to the top) profit line. As such, it is followed by analysts. Actually, it is probably more accurate to write that it is the gross profit margin which is followed. In the example above where the gross profit is half the sales price, well that’s 50% which is the gross profit margin.
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This glossary post was last updated: 6th August, 2021 | 106 Views.