How to Calculate Gross Profit in Financial Accounting

by Mark Kennan

The gross profit measures a company's profit after accounting for the cost of the goods it sells. The gross profit shows how much a company is able to add to its cost of goods before it sells the products to consumers. However, the value of gross profit is limited by the fact that it does not include selling expenses, administrative expenses and taxes, so a company could have a large gross profit but have an overall loss for the year.

1. Calculate the company's total revenue including sales, interest and dividends received from investments.

2. Total the company's costs of goods sold. If the company is a manufacturing firm, include the direct materials, direct labor and overhead costs involved in manufacturing the goods. If the company is a retail firm, only include the costs paid for the goods sold. Do not include the costs of selling the goods in either calculation.

3. Subtract the company's total costs of goods sold from the company's total revenues to find the gross profit. For example, if the company has revenues of $88 million and costs of goods sold of $50 million, the company's gross profit equals $38 million.

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