How does gross profit differ from net profit?

Gross profit is defined as the difference between revenue and the cost of goods sold (COGS). This calculation reflects the amount of money a company makes from its core business operations before accounting for other expenses such as operating expenses, interest, and taxes. Understanding this distinction is essential because it highlights how much money is generated from sales activities after directly related costs are deducted.

In contrast, net profit, which other options might be referencing in various ways, encompasses all revenues and subtracts not only COGS but also operational expenses, taxes, and interest. This ultimately yields the profit available to shareholders or reinvestment in the business. Therefore, distinguishing gross profit as specifically related to revenue and direct costs provides insight into operational efficiency, while net profit offers a broader perspective on overall profitability and financial health.