What is the difference between gross profit and net profit?

• A. Gross profit includes taxes.
• B. Net profit equals gross profit.
• C. Gross profit equals revenue minus cost of goods sold.
• D. Gross profit = revenue minus cost of goods sold; net profit = gross profit minus all other operating expenses, taxes, interest.

Answer: (D)

The main idea is that gross profit and net profit measure profitability at different stages of the business’s costs. Gross profit shows how much money is left from sales after covering the direct costs of goods sold (the production or procurement costs). It does not include operating expenses, taxes, interest, or other costs. Net profit, in contrast, is the bottom-line amount after subtracting all other expenses—operating costs like salaries, rent, and marketing, plus taxes, interest, and any non-operating items—from gross profit. So the clean relationship is: gross profit = revenue minus cost of goods sold; net profit = gross profit minus all other operating expenses, taxes, and interest. This explains why net profit is usually smaller than gross profit and gives the full picture of overall profitability. For example, with revenue of 100 and COGS of 60, gross profit is 40. If operating expenses total 15 and taxes/interest total 7, net profit is 18.