Q5-5RQ - Horngren'S Financial And Managerial Accounting

Question

How is gross profit calculated, and what does it represent?

Step-by-Step Solution

Answer

Gross profit is the difference between the net sales revenues earned by a business concern and the cost of goods sold. 

Meaning of Profit

The term profit denotes the monetary benefit earned by a business entity. When the revenues of a business exceed its expenses, then the difference between the two will be treated as profit. 

Computation of gross profit

The gross profit of a business concern is computed by taking the difference between its net sales revenues and the cost of goods sold. The formula for computing gross profit is as follows:

 

The gross profit represents the profit earned by the company on the sale of merchandise over the cost paid by it to vendors.