How is gross profit calculated?

Gross profit is calculated by taking net sales and subtracting the cost of goods sold (COGS). This figure represents the profit a company makes after accounting for the direct costs associated with producing the goods it sells. It is a crucial measure of a company's operational efficiency and profitability related to its core business activities.

Net sales refer to the total revenue from sales of products or services after deducting returns, allowances, and discounts. The cost of goods sold includes all costs directly tied to production, such as materials and labor. Thus, gross profit reflects how effectively a business converts its sales into profit before accounting for operating expenses, taxes, and other costs.

Other options do not accurately reflect the calculation of gross profit. For instance, subtracting taxes or liabilities does not relate to the fundamental movement of income from product sales. Operating income and expenses are broader financial measurements that already take into account gross profit but don't reflect the direct calculation involved in determining gross profit itself.