The gross profit earned by a business firm or an individual can be determined by subtracting inventory cost from total sales.
In Financial accounting, a cost can be defined an amount of money that's incurred by a business firm (manufacturer) to create goods or services to meet the unending needs, wants and requirements of its customers. Thus, the cost of producing a good or service determines the price it would be sold i.e its selling price.
- An inventory cost is total cost incurred by a business to order, hold and manage inventory.
- Net income can be defined as the amount of money earned by a business firm after deducting depreciation and amortization, taxes, expenses, interests, cost of goods sold (COGS) over a specific period of time.
Mathematically, net income is given by the formula;
[tex]Net\; income = Total \;revenue/Gross\; profit - Total \;expenses[/tex]
- Gross profit can be defined as the profit earned by a business after subtracting its cost of manufacturing and distributing goods from its total revenue (sales).
Mathematically, gross profit is given by the formula;
[tex]Gross \;profit = Total \;sales - Inventory \;cost/Cost \;of \;goods\; sold[/tex]
In conclusion, you should subtract your inventory cost from total sales (revenue) to determine your gross profit for an accounting period.
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