How is gross profit calculated?

Gross profit is calculated by taking the revenue generated from sales and subtracting the cost of goods sold (COGS). This formula reflects the amount of money a company makes after accounting for the direct costs associated with producing the goods it sells. In simple terms, it shows how efficiently a company is using its resources to generate profit from its core operations.

Calculating gross profit is important because it provides insight into a company's operational performance. A higher gross profit indicates that a company has more money left over to cover operating expenses, interest, taxes, and ultimately contribute to net income.

The other options do not accurately reflect the relationship between revenue and costs necessary for determining gross profit. For instance, adding COGS to revenue would incorrectly inflate the profit figure, while including total expenses or assets and liabilities doesn’t apply to the gross profit calculation. This understanding is crucial for analyzing business performance and making informed financial decisions.