How Is Gross Profit Calculated?

Calculate Gross Profit

Gross profit is equal to the total income minus the cost of goods sold. Subtract the cost of goods sold from the sales and that will equal the gross profit.

Calculate Income

A business' income is the total of all sales. For a purely retail establishment, this would be the total income from all the goods sold. For companies that sell services as well as good, this total would include income from both tangible and intangible goods sold, with intangible goods sold including things such as consulting or warranties. This tells companies how much money is coming in from the goods and services being sold.

Calculate Cost of Goods Sold

The cost of goods sold includes any cost the the company had to pay to produce the final product. This can include the cost of raw materials, machinery to produce the goods, labor and transportation costs. This is useful to companies because it allows them to see where they are spending their money, and how much it is costing to produce goods and services.

References

• Understanding Financial Ratios