Question

Describe the difference between gross profit and income from operations. Why would a company be concerned with gross profit rather than just overall income from operations?

Answer 1

Difference between gross profit and income from operations are as follows:-

Gross profit is the income earned by a company after deducting the direct costs of producing its products. direct cost include Direct materials, Direct labor, manufacturing cost etc.

Gross profit = Revenue - Cost of Goods Sold

Revenue is the total amount of income from sales in a particular period. Revenue is also called net sales as discounts and deductions from returned items/product are deducted.

Cost of Goods Sold is the direct cost in producing the products. It includes direct labor costs, and costs of materials used in producing or manufacturing products.

On the other hand Operating income is company's profit after subtracting operating expenses or daily running cost of business. Operating profit is also called Earning before interest and tax (EBIT).Operating expenses maybe selling, general and administrative expenses (SG&A), depreciation, and amortization etc.

Operating Income = Gross profit - operating Expense

Both Gross profit and Operating income is part of Income Statement.

Format of Income statement is given below:-

Company is concerned with gross profit rather than just overall income from operations because it reflects the core profitability of a company before overhead costs and plays an important role in determining the net profit. It shows the financial success of a product or service.  It reflects the efficiency of a business in terms of making use of its labor, raw material and other supplies. It is used to calculate gross profit margin which is, (gross profit / total revenue). It allows you to compare similar companies to each other.