Definition of Gross Profit
Gross profit is defined as net sales minus the cost of goods sold.
Gross profit is sometimes referred to as gross margin. (However, gross margin can also mean the gross profit expressed as a percentage of net sales.)
Gross profit is presented on a multiple-step income statement prior to deducting selling, general and administrative expenses and prior to nonoperating revenues, nonoperating expenses, gains and losses.
Example of Gross Profit
Let’s assume that a manufacturer has net sales of $60,000 and its cost of goods sold (using absorption costing) is $39,000. Therefore, the manufacturer’s gross profit is $21,000 ($60,000 minus $39,000). The gross profit ratio or gross profit percentage is 35% (gross profit of $21,000 divided by net sales of $60,000).
