Gross profit is net sales minus the cost of goods sold. (Some people use the term gross margin and gross profit interchangeably. Others use gross margin to mean the gross profit ratio or the gross profit as a percentage of net sales.)

Gross profit is presented on a multiple-step income statement prior to deducting sellling, general and administrative expenses and prior to nonoperating revenues, nonoperating expenses, gains and losses.

To illustrate gross profit, let's assume that a manufacturer's net sales are $60,000 and its cost of goods sold (using absorption costing) is $39,000. The manufacturer's gross profit is $21,000 ($60,000 minus $39,000). The gross profit ratio or gross profit percentage is 35% ($21,000 divided by $60,000).

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