What distinguishes gross profit from net profit?

Gross profit and net profit are two crucial measures of a company's financial performance, and their distinction lies primarily in how they are calculated and the components involved.

Gross profit is defined as the difference between sales revenue and the cost of goods sold (COGS). This measures how efficiently a company uses its resources in production and directly relates to the core operational activities of producing goods or services. It reflects the profitability of the company's core activities without accounting for other operational expenses, taxes, or interest payments.

On the other hand, net profit is a more comprehensive measure that accounts for all expenses incurred by the company. It starts with gross profit and then deducts operating expenses, interest, taxes, and any other expenses. Therefore, net profit provides a clearer picture of a company’s overall profitability, as it reflects all costs associated with running the business.

The correct answer illustrates this relationship accurately, showing that gross profit is calculated from revenue minus the cost of goods sold and that net profit further subtracts operating expenses and taxes from gross profit. This understanding is essential for analyzing a company's financial statements and determining its overall financial health.