Gross Profit Quick Question

Q: If net revenue equals $50,000, cost of sales $20,000 and operating expenses $10,000, then what does the gross profit come to?

A: This question is not as hard as it seems, but it's testing your knowledge of the income statement (also known as the profit and loss). If you know the format of the income statement, then this question is not so hard.

First of all let's look at what we need. We need to find the gross profit. Where is the gross profit on the income statement? How do we calculate it?

Gross profit is just below sales and cost of sales.

The formula for gross profit is:
Sales - cost of sales = gross profit

Do we have sales and cost of sales to work this out?

Yes, we do!

You see, revenue and sales are the same thing. Net revenue is the same thing as net sales. Net sales is simply sales less sales returned.

So we simply do:

Net revenue - cost of sales = gross profit
$50,000 - $20,000 = $30,000

So the gross profit comes to $30,000.

Alternative Gross Profit Question & Answer to Really Test You

Now let's say for a second we have the same example above but the "net revenue" is actually "net profit."

In this case we have to consider what happens on the income statement after we have gross profit. We next have other income (if a business actually has made some other income) and operating expenses and we finally get to net profit or net revenue (same thing).

Out of this we can work out a formula:

Net profit = Gross profit + Other income - Operating expenses

And from this we get:

Gross profit = Net profit - Other income + Operating expenses
= $50,000 - $0 + $10,000
= $60,000

So in this case (working the income statement backwards) our gross profit comes to $60,000.

- Michael Celender

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