Gross profit is the total revenue a company generates from its goods or services minus the cost of producing or delivering them. It's the initial profit before other business expenses are subtracted.
While the above definition provides a general understanding, there's more to gross profit. It's often reported as a line item on a company's income statement, right after total revenue and cost of goods sold (COGS). The COGS includes direct costs like raw materials and direct labor costs involved in production.
Gross profit is a key indicator of a company's operational efficiency and profitability. It reflects how effectively a company uses its resources in the production process. Higher gross profit can often translate to higher operational efficiency.
However, gross profit does not account for other business costs like sales, marketing, administrative expenses, or taxes. Net income, which is calculated after these costs are deducted from gross profit, provides a more complete picture of a company's overall profitability.
In financial terminology, the terms "gross profit" and "gross income" are often used interchangeably, but they can sometimes represent distinct concepts depending on the context or the regional accounting standards.
Gross Profit: Gross profit is a company's total revenue minus the cost of goods sold (COGS). The cost of goods sold includes all the direct costs associated with producing or delivering the products or services sold by the company, such as raw materials and labor costs. It does not include indirect expenses such as sales, marketing, or administrative costs. Gross profit is typically a line item on a company's income statement.
Gross Income: the term gross income is not use in financial statement. In the corporate context, gross income is often synonymous with gross profit. However, in personal finance, gross income refers to an individual's total income before taxes and other deductions.
For General Motors, gross profit is calculated by subtracting the costs of producing vehicles (like raw materials and direct labor costs) from the total revenue generated by vehicle sales.
Microsoft's gross profit comes from subtracting the costs directly associated with software development (like salaries of developers) from the revenue generated by selling their software products and services.
For Amazon, gross profit is computed by subtracting the direct costs of goods sold (like procurement costs) from its total sales revenue. Amazon's gross profit also considers the costs related to their warehouses and delivery infrastructure, as they are directly involved in fulfilling customer orders.