What is calculated by subtracting cost of goods sold from net sales?

The calculation of gross profit involves taking net sales and subtracting the cost of goods sold (COGS). Net sales represent the total revenue from sales after returns, allowances, and discounts have been accounted for. COGS includes all the direct costs associated with producing the goods that have been sold, such as materials and labor.

By subtracting COGS from net sales, you arrive at gross profit, which indicates how much money is made from sales after accounting for the costs directly tied to the production of those goods. This figure is crucial for businesses as it provides insight into production efficiency and pricing strategy. It is an essential metric for assessing the profitability of a company's core operations before other expenses, such as operating expenses and taxes, are taken into account.

While net income represents the profit after all expenses, including operating and non-operating expenses, and operating income reflects earnings before interest and taxes, neither of these metrics is derived directly from subtracting COGS from net sales. Revenue simply refers to the total amount earned from sales before any deductions. Therefore, the correct focus on the subtraction of COGS from net sales leads to the determination of gross profit.