Gross profit

Gross profit refers to the excess of net sales over the cost of goods sold.

Companies deduct from sales revenue the cost of goods sold in order to determine gross profit. For this computation, companies use net sales as the amount of sales revenue. On the basis of the sales data in Illustration as mention below (net sales of $460,000) and cost of goods sold under the perpetual inventory system (assume $316,000), PW Audio’s gross profit is $144,000 computed as follows.

                  Net sales                                                         $460,000

                  Cost of goods sold                                           316,000

                  Gross profit                                                    $144,000

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