Which components are used to compute gross profit?

• A. Income and Cost of Goods Sold
• B. Assets and Liabilities
• C. Net Income and Operating Expenses
• D. Equity and Revenue

Answer: (A)

Gross profit measures how much money a company makes from its core selling activities after accounting for the direct cost of producing or purchasing the goods sold. The two figures involved in this calculation are revenue from sales and the cost of goods sold. Subtracting COGS from revenue reveals the gross profit, which reflects efficiency in turning inventory into profit before considering operating expenses, taxes, or interest.

Assets and liabilities belong on the balance sheet and don’t factor into the gross profit calculation. Net income and operating expenses would be used to determine net income, not gross profit, since net income takes those operating costs into account after gross profit. Equity and revenue don’t form the calculation for gross profit, because equity represents owners’ claims on assets, not the profitability of sales, and revenue alone doesn’t account for what was spent to produce the goods sold.

For a quick example: if revenue is 100,000 and the cost of goods sold is 60,000, gross profit is 40,000.