Entrepreneurship and Small Business (ESB) V2 Certification Practice Exam

What is the formula for calculating gross profit?

1. Total income - COGS

2. Sales revenue - Operating expenses

3. Revenue - Equity

4. Assets - Liabilities

The correct answer is: Total income - COGS

The formula for calculating gross profit is derived from the concept that gross profit represents the difference between what a business earns from its sales and the costs directly associated with producing its goods or services. This is known as the Cost of Goods Sold (COGS). Total income is synonymous with sales revenue, and when you subtract COGS from this amount, you arrive at the gross profit. This figure is critical for businesses as it showcases the efficiency of their production processes and pricing strategies. The other options represent different financial calculations. Sales revenue minus operating expenses leads to net profit rather than gross profit. Revenue minus equity does not relate to profit calculations, and assets minus liabilities would yield the owner's equity in the business, which is unrelated to gross profit. Understanding these distinctions helps highlight the importance of focusing specifically on revenue and COGS when calculating gross profit.