Virginia Contractor General Practice Test

What is typically deducted when calculating Gross Profit?

1. Net Income

2. Cost of Goods Sold

3. Expenses

4. Liabilities

The correct answer is: Cost of Goods Sold

Gross Profit is determined by taking a company's revenue and subtracting the Cost of Goods Sold (COGS). This calculation reflects the profitability of a company's core business activities, specifically its efficiency in producing and selling its products or services. COGS includes all costs directly related to the production of goods sold by the business, such as materials, labor, and manufacturing overhead. By deducting these costs from total revenue, you arrive at the gross profit figure, which serves as an essential indicator of operational performance. In contrast, net income encompasses all revenues and expenses, including taxes and interest, which means it factors in more than just the costs associated with production. Expenses and liabilities refer to a broader scope of financial obligations and operational overhead that do not specifically pertain to the calculation of gross profit. Thus, the focus on COGS in this calculation is critical for evaluating a company's gross revenue generated from its operations.