How do you calculate gross profit?

The calculation of gross profit is fundamental in financial reporting and provides insight into a company's core profitability from its primary operations. Gross profit is determined by subtracting the cost of goods sold (COGS) from total revenue. This calculation specifically focuses on the direct costs associated with the production of goods sold by a company, allowing stakeholders to evaluate how efficiently a company is producing its goods in relation to sales generated.

Total revenue represents the full income generated from sales activities before any costs have been deducted. By subtracting the COGS, you isolate the profit made on sales before accounting for other expenses such as administrative costs, marketing, and general operating expenses. This measure is crucial because it helps in understanding whether a company is making enough to cover its production costs, thereby determining pricing strategies and overall operational efficiency.

The other options pertain to different financial metrics and do not correctly reflect how gross profit is calculated. For instance, subtracting current liabilities from current assets yields working capital, while total income minus expenses would provide net profit rather than gross profit. Finally, the division of sales revenue by total assets relates to asset turnover, not gross profit. Thus, the correct choice effectively describes the specific financial calculation that leads to the determination of gross profit.