Textbook Problem

What is the term used for the profit on a sale before any operating expenses have been deducted?

1. a. Net Income
2. b. Net Profit
3. c. Gross Profit
4. d. Gain on Sale
5. e. All of the above

To determine

Find the correct option that indicates the correct term for the given explanation.

Answer to Problem 1QY

The correct answer is option (c).

Explanation of Solution

Gross profit: Gross profit is the amount of revenue earned from goods sold over the costs incurred for the goods sold.

Formula to compute gross profit:

$\text{Gross profit = Net sales – Cost of goods sold}$

Justification for correct answer: Gross profit is the difference between net sales and cost of goods sold. The amount of cost of merchandise sold during a certain period is referred to as cost of goods sold. Cost of goods sold does not include any operating expenses. So, gross profit is the revenue generated from sales over the cost of goods sold, before any operating expenses are incurred. Hence, option (c) is correct.

Justification for incorrect answers:

• Option (a) is incorrect because net income is the difference between total revenues and total expenses of a business.
• Option (b) is incorrect because net income or net profit is the difference between total revenues and total expenses of a business.
• Option (d) is incorrect because gain on sale is the amount realized on sale transaction, when the sale proceeds is more than the book value of the asset on the date of sale.
• Option (e) is incorrect because option (c) is the correct answer and the phrase ‘all of the above’ is incorrect.

Conclusion

Therefore, option (c) is correct answer.