Gross profit
Revenue less the cost of the goods or services sold. It measures what the product earns before any overheads, and divided by revenue it gives the gross margin.
Where you will meet it
Gross profit appears in 3 learning outcomes on the CFA syllabus. A few of them:
- Set out the parts that make up an income statement
“Revenue sits at the top; subtracting cost of goods sold gives gross profit, and subtracting operating expenses gives operating profit.”
- Work out profitability margins and explain what they mean
“Gross margin is gross profit over revenue and reflects pricing power and production cost.”
- Analyse how the choice of inventory method changes financial ratios
“In a rising-price environment LIFO lowers reported inventory, gross profit, net income and total assets relative to FIFO, and raises cost of goods sold.”
See also
Practise it
Practise gross profit until it is automatic: questions that explain every wrong option.
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