Distinguish gross profit from net income and how each is calculated.

• A. Gross profit equals Net Revenue.
• B. Gross profit equals Net Revenue minus Cost of Goods Sold.
• C. Gross profit equals Net Revenue minus Cost of Goods Sold; Net income equals Net Revenue minus COGS minus expenses.
• D. Gross profit equals Net Revenue minus COGS, and Net income equals Net Revenue.

Answer: (C)

Gross profit measures the profitability of producing goods and is found by taking net revenue (sales after returns and discounts) and subtracting the cost of goods sold (COGS), the direct costs of producing those goods. Net income, on the other hand, is the bottom line after all expenses: you take net revenue, subtract COGS, and then subtract operating expenses and any other costs or add any other income. So the correct relationship is gross profit = net revenue minus COGS, and net income = net revenue minus COGS minus expenses. For example, if net revenue is 100, COGS is 60, and other expenses total 20, gross profit is 40 and net income is 20. The other options misstate these relationships: gross profit is not simply net revenue, net income is not equal to net revenue, and it’s not correct to omit expenses when calculating net income.