Gross Profit

Let's break down at the first equation from the income statement: Revenue - Cost of Goods Sold = Gross Profit

The income statement starts with the following equation:

Revenue - Cost of Goods Sold = Gross Profit 🧮

As you learned before, revenue is the money a company receives from selling its product or service 💰

For example, let’s say a company sells T-shirts 👕

If it sells 1,000 T-shirts for $10 each, the company has made 1,000 x $10 = $10,000 in revenue

Cost of Goods Sold or COGS, are the direct costs associated with producing and delivering the goods or services sold by the company 🔩

Consider the T-Shirt company:

The expenses associated with producing each T-shirt, such as cotton, stitching, and packaging, are considered COGS 🧵

However, COGS only includes direct costs of producing a product or service, not indirect costs like marketing, sales, or even product development 🚫

By subtracting COGS from revenue, we get Gross Profit

Gross Profit is important because it is the maximum amount of money a company can earn if it has no other costs 🏆

For our T-shirt company, let’s say that each T-shirt costs $4 to produce, so selling 1,000 shirts incurs COGS of:

1,000 x $4 = $4,000

Taking the revenue of $10,000 and subtracting $4,000 of COGS would give us $6,000 of Gross Profit 💡

But COGS are not the only expense for any company, so Gross Profit is not its "real" profit!

Let's look at the next equation in the next lesson 🔍

Test your knowledge

What is Revenue?

Choose an option

How is Gross Profit calculated?

Choose an option

What does COGS stand for?

Choose an option

Which costs are included in COGS?

Choose an option

What does Gross Profit represent?

Choose an option

What's next?

Featured Lessons