Florida Building Contractor Business/Finance Practice Exam

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How is gross profit calculated?

  1. Total Revenue subtracting Expenses

  2. Sales plus Cost of Goods Sold

  3. Sales minus Cost of Goods Sold

  4. Total Revenue divided by Costs

The correct answer is: Sales minus Cost of Goods Sold

Gross profit is calculated by taking sales and subtracting the cost of goods sold (COGS). This measurement represents the revenue left over after covering the direct costs associated with producing goods or services. It is an important indicator of a company's financial performance, as it shows how efficiently a business is generating profit from its core operations before taking into account operating expenses, taxes, and other costs. While total revenue refers to all income generated by the business, it is gross profit that focuses specifically on the profitability linked to the production of goods sold. Calculating gross profit helps businesses analyze how efficiently they are managing their production and sales operations, allowing for better financial decision-making and strategy development.