What is the formula for Gross Profit and what is included in COGS?

• A. Gross Profit = Net Sales - Cost of Goods Sold; COGS = Beginning Inventory + Purchases - Ending Inventory (for a periodic system)
• B. Gross Profit = Net Income - Operating Expenses; COGS = Beginning Inventory - Ending Inventory
• C. Gross Profit = Sales - Operating Expenses; COGS = Purchases - Ending Inventory
• D. Gross Profit = Net Sales - Ending Inventory; COGS = Beginning Inventory + Ending Inventory - Purchases

Answer: (A)

Gross profit is found by subtracting the cost of goods sold from net sales. Net sales represent the revenue from selling goods after accounting for returns, allowances, and discounts, so it reflects the actual sales income. The cost of goods sold measures the cost of the inventory that was actually sold during the period. In a periodic inventory system, you determine COGS at the end of the period using Beginning Inventory plus Purchases minus Ending Inventory. This captures how much inventory was used up to generate the period’s sales. Therefore, Gross Profit = Net Sales − Cost of Goods Sold, with COGS calculated as Beginning Inventory + Purchases − Ending Inventory. The other options mix in operating expenses, use the wrong sales figure, or apply incorrect inventory math, which doesn’t match how gross profit and COGS are defined.