How is gross profit best defined?

Gross profit is best defined as the difference between sales revenue and the cost of goods sold (COGS). This measure reflects the basic profitability of a company's core business activities, excluding other expenses such as operating expenses, taxes, and interest. By focusing solely on the direct costs associated with producing goods or services, gross profit provides insight into how efficiently a company is using its resources to generate sales.

When a company sells its products, the revenue generated is first assessed against the costs incurred to create or purchase those products (the cost of goods sold). The resulting figure represents gross profit, which is crucial for analyzing whether a company is pricing its products effectively and managing production costs efficiently. Understanding gross profit helps stakeholders evaluate a company's performance and make informed financial decisions.

This definition distinguishes gross profit from other financial metrics like net income, which accounts for all expenses and taxes, and other forms of profit that do not focus specifically on the performance related to sales and COGS.