What does the term 'gross profit' exclude from its calculation?

The term 'gross profit' refers specifically to the revenue generated from sales minus the cost of goods sold (COGS). It essentially measures the profitability of a company's core activities, focusing on how efficiently it can produce and sell its products.

Operating expenses are costs incurred in the day-to-day operations of a business that are not directly tied to the production of goods. By excluding operating expenses from the calculation of gross profit, the measure allows a clear view of the profitability of sales operations alone, without the influence of additional financial factors such as administrative expenses, marketing expenses, or rent.

Therefore, while sales returns, discounts, and cost of goods sold are critical components in different aspects of profit calculations—sales returns and discounts directly affect revenue and COGS is essential for determining gross profit—the focus of gross profit specifically isolates itself from operating expenses, which are considered in a different profit metric known as operating profit.