A:

Gross profit, the accounting term used to represent the profitability of a production process, is one of the three profit metrics that appear as line items on an income statement, which investors use to see how a company is performing. The other two metrics are operating profit and net income. Unlike net income, gross profit does not take into account taxes paid by the company. This is because gross profit highlights a business activity that exists prior to the business paying income taxes.

What Is Gross Profit?

Gross profit is the number left over after a company subtracts the cost of goods sold, or COGS, from its revenues or sales. This statistic is often referred to as "gross margin" in the United States. One of the primary analytical functions of gross profit is to indicate a company's ability to earn enough money above present expenses to fulfill future expenses; in other words, it highlights cash flow. Gross profit figures vary dramatically from industry to industry, so investors often review competitors' gross profit margins to interpret the relative strength of any one firm's gross profit number.

Another use of gross profit is that it represents how efficiently a company uses labor, raw materials and capital equipment. Companies that are more efficient tend to have higher equity and distribute more dividends. There are taxes paid on the purchase of capital equipment and on labor, so in that sense, gross profit does include some taxes. Those taxes, however, do not represent a line item on an income statement and are of no use to investors.

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