What Is Equal to Gross Profit?
Gross profit management is a tale of effective sales administration and expense monitoring. Companies often invest into fast-growing economic sectors to offset the red ink that comes with rising costs. Monitoring gross profit goes hand-in-hand with profit management, an important exercise that helps businesses thrive and expand.
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Sales
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Investors and the public pay close attention to revenue amounts to distinguish healthy companies from firms experiencing moribund performance. Securities-exchange participants pore over revenue amounts to ensure conformity to accounting norms. These include generally accepted accounting principles, U.S. Securities and Exchange Commission directives and international financial reporting standards. Under International Financial Reporting Standards, IFRS, and Generally Accepted Accounting Principles, GAAP, net sales equal gross sales revenue minus customer discounts and rebates.
Costs of Goods Sold
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Material costs are often subject of debate among a company's top leadership. This is especially true if the firm deals with many vendors. Department heads may want to study various price proposals from prospective suppliers before making a decision and placing orders. Costs of goods sold include charges incurred in purchasing and transporting merchandise from suppliers' warehouses to corporate storage facilities.
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Gross Profit
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Gross profit, also known as gross income, indicates a company's ability to generate a return on its resources. This profitability indicator equals total sales minus costs of materials. These include charges the firm incurs in converting raw materials into completely finished items and semi-finished products.
Illustration
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The management of a company reviews operating results, wondering what new strategies the firm can implement to spur sales. The corporate controller believes that, unless top leadership changes course, the company may lose market share in the next three years. The controller directs cost accountants to calculate the current year's gross profit and net income. Accounting data for the year are as follows: sales revenue for $1.5 million, costs of goods sold for $500,000 and general expenses for $300,000. The accountants calculate that gross profit equals $1 million, or $1.5 million minus $500,000. The corporate profit for the year is $200,000, or $500,000 minus $300,000.
Financial Reporting
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Gross profit in one section of a company's income statement. This accounting report is also known as a statement of profit and loss, statement of income or P&L. Accountants subtract general and administrative expenses from gross profit to calculate corporate net income. By law, publicly listed firms issue other financial statements when calculating gross profit. These accounting data summaries include a statement of cash flows, a report on shareholders' equity and a balance sheet, also called a statement of financial position.
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