How do gross profit and net profit differ?

The distinction between gross profit and net profit is vital in financial accounting, as it reflects different stages of a company's profitability.

Gross profit is defined as the difference between sales revenue and the cost of goods sold (COGS). It provides insight into how efficiently a company is producing and selling its products, as it measures the profitability directly associated with the core business activities related to its products or services.

Net profit, on the other hand, is derived after taking into account not only COGS but also all other operating expenses, interest, taxes, and any other costs required to run the business. It represents the actual profit after all expenses have been deducted from total revenue, indicating the company's overall financial health.

The chosen answer accurately captures the relationships between these metrics: gross profit is calculated from sales revenue minus COGS, and net profit is derived from gross profit after subtracting operating expenses. This clear progression highlights how each profit measure contributes to understanding a company’s financial position.