Which of these statements best describes the relationship between gross profit and net profit?

The relationship between gross profit and net profit is crucial for understanding the financial health of a business. Gross profit refers to the revenue remaining after deducting the cost of goods sold (COGS), which represents the direct costs tied to the production of the goods sold by a company. This figure gives insight into how efficiently a company is producing and selling its products.

The correct statement notes that gross profit is calculated without accounting for expenses, which typically include operating costs, taxes, interest, and other overhead costs necessary to run the business. Net profit, on the other hand, is derived by subtracting all of these additional expenses from gross profit. Thus, gross profit serves as the basis for calculating net profit, illustrating that gross profit does not reflect the total expenses incurred by the business.

Understanding this distinction helps convey why gross profit can often be higher than net profit, and why managing expenses effectively is vital for maximizing net profit. Other statements present misconceptions about the definitions and relationships of these profits.