What is the correct formula for calculating gross profit?

Gross profit is fundamentally a financial metric that represents the difference between sales revenue and the cost of goods sold (COGS). This calculation provides insight into how efficiently a company is producing and selling its goods at a profit.

Sales revenue refers to the total income generated from selling goods or services, while the cost of goods sold includes all direct costs associated with producing those goods, such as materials and labor. By subtracting COGS from sales revenue, businesses can assess their gross profit, which is critical for understanding their basic profitability before accounting for other expenses like operating costs, taxes, and interest.

The other approaches presented in the other choices do not accurately reflect how gross profit is defined and calculated in accounting, as they either incorporate elements not related to the calculation of gross profit (like total expenses or liabilities) or focus on profit levels after other expenses, which shifts the focus away from the core measurement of gross profit. Thus, the formula that correctly identifies the method for determining gross profit is indeed to subtract the cost of goods sold from sales revenue.