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How does gross profit differ from net profit in financial statements?

Gross profit and net profit differ in that gross profit only considers direct costs, while net profit includes all expenses.

Gross profit, also known as gross income, is the total revenue of a company minus the cost of goods sold (COGS). The COGS includes only the direct costs associated with the production of goods or services that a company sells. These costs typically include raw materials, direct labour costs, and manufacturing overheads. Gross profit is a measure of a company's efficiency in turning raw materials into income; the higher the gross profit, the better.

On the other hand, net profit, also referred to as net income or bottom line, is a company's total revenue minus all expenses, not just the COGS. These expenses include operating expenses like salaries, rent, utilities, depreciation, and amortisation. It also includes interest expenses, tax expenses, and other miscellaneous costs. Net profit is the amount of money a company has left over after paying off all its expenses. It's a more comprehensive measure of a company's profitability and financial health.

In essence, while gross profit gives an initial insight into a company's manufacturing or service delivery efficiency, net profit provides a more complete picture of overall business efficiency. Both are crucial for understanding a company's financial performance, but they serve different purposes. Gross profit is often used to quickly gauge production efficiency and pricing strategy, while net profit is used to assess overall profitability and business sustainability.

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