Certified Financial Management Specialist Practice Exam

What is gross profit primarily calculated by?

1. Revenue minus indirect expenses

2. Revenue minus direct costs associated with sales

3. Operating profit minus taxes

4. Net income minus capital expenditures

The correct answer is: Revenue minus direct costs associated with sales

Gross profit is primarily calculated by subtracting direct costs associated with sales, which are often referred to as cost of goods sold (COGS), from total revenue. This calculation reflects the company's efficiency in producing and selling its goods before considering overhead expenses, taxes, or other indirect costs. In this context, revenue refers to the total income generated from sales of goods or services, while direct costs include expenses that can be directly tied to the production of those goods, such as materials and labor. By focusing specifically on these costs, gross profit provides insight into the basic profitability and operational performance of a business. Understanding gross profit is critical for financial management as it lays the foundation for further calculations, like operating profit and net income, which consider indirect costs and other expenses. It serves as an essential indicator of a company's core profitability before any additional expenses are accounted for.