What does gross profit on an income statement represent?

• A. Revenue minus costs of goods sold
• B. Total revenue
• C. Net income after taxes
• D. Operating profit before expenses

Answer: (A)

Gross profit on an income statement is defined as the difference between revenue and the cost of goods sold (COGS). This metric is crucial for evaluating a company's production efficiency and pricing strategies because it indicates how much money a company makes from its core business activities before accounting for other expenses such as operating costs, taxes, and interest.

When calculating gross profit, COGS includes all direct costs associated with the production of goods sold, such as materials and labor, while revenue refers to the total amount generated from sales. This distinction helps analysts understand how well a company is performing in terms of its primary operations.

The other choices highlight different financial metrics that do not accurately define gross profit. Total revenue represents the total income before any deductions, which does not account for the costs associated with making products. Net income after taxes reflects the profitability after all expenses, which includes more than just COGS. Operating profit before expenses also encompasses various costs and is not specific to the direct costs of production. Thus, only the first choice accurately captures the definition of gross profit.