How do gross profit and net profit differ?

Gross profit and net profit are essential metrics in financial accounting that measure different aspects of a company's profitability. The correct choice accurately describes these two concepts.

Gross profit is determined by subtracting the cost of goods sold (COGS) from total revenue. This calculation reflects the profit a company makes directly from its core operations before accounting for other expenses. It assesses how efficiently a company produces and sells its goods or services.

Net profit encompasses a more comprehensive view of a company's profitability. After calculating gross profit, net profit is derived by subtracting not only operational expenses—such as selling, general, and administrative costs—but also other expenses like interest and taxes. Therefore, net profit reflects the company's total profitability after accounting for all costs associated with running the business.

By accurately distinguishing between gross profit and net profit, it becomes easier to gauge both the operational performance and overall financial health of a business. This understanding is crucial for stakeholders who analyze company performance for investment or financial management purposes.