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What Is Gross Profit?
Gross margin is one of the best indicators of a company's growth prospects. Learn where to find it and how to Gross Loss( 毛亏损 ) analyze it.
Gross profit, also known as gross income, is the amount of revenue that Gross Loss( 毛亏损 ) remains after the direct costs of providing a product or service are subtracted. Investors evaluate a company's gross profit to understand whether the company is able to charge premium prices or prices that just barely cover the product or service's direct costs.
Those direct costs associated with making a product or providing a service are known as the cost Gross Loss( 毛亏损 ) of goods sold, or COGS. Gross profit is simply equal to revenue minus COGS.
Example of Gross Loss( 毛亏损 ) gross profit
Let's walk through an example to better understand gross profit and how it Gross Loss( 毛亏损 ) is calculated.
|Subcontractor services||$ 3,000,000|
|Cost of goods sold||$ 7,000,000|
|Gross Gross Loss( 毛亏损 ) Profit||$ 3,000,000|
This company has Gross Loss( 毛亏损 ) Gross Loss( 毛亏损 ) $10 million of revenue. The direct costs — those associated with making the product — Gross Loss( 毛亏损 ) amount to $7 million. Subtracting $7 million from $10 million yields a gross profit for the company of $3 million.
A $3 million gross profit from $10 million of revenue equates Gross Loss( 毛亏损 ) to a 30% gross margin. While gross profit is the amount of money as an absolute value that remains after COGS is subtracted, gross profit margin is gross profit as a percent of revenue.
What gross profit can tell you
Since gross profit is an absolute number, it is somewhat less useful as a comparison tool for investors than gross profit margin, Gross Loss( 毛亏损 ) which is a percent. Investors can more easily use the gross profit margin metric to analyze and compare companies.
However, you can better understand a company's gross profit by closely examining its COGS. Product businesses usually have higher COGS than service businesses, meaning that product Gross Loss( 毛亏损 ) businesses generally have lower gross profits. But service business usually have higher operating expenses than product businesses, so higher gross profits are necessary for service businesses to pay for fixed Gross Loss( 毛亏损 ) costs such as insurance or marketing.
If two similar companies with similar revenues have much different Gross Loss( 毛亏损 ) gross profits, then the company with the higher gross profit likely has some significant competitive advantage. If a company's revenue over time stays constant but its gross profit sharply declines, then one or more of its direct costs has significantly increased. Sometimes a company's COGS stays constant but its gross profit drops because the price the company is able Gross Loss( 毛亏损 ) to charge for its product or service has substantially declined.
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After gross profit on the balance sheet
After gross profit, investors compute operating profit. A company's operating profit is its gross profit minus its fixed costs. Costs are fixed if they do not vary with the amount of a product or service that the company provides. Usually the most major fixed costs are related to management and administration, sales, research and development, and rent and utilities.
After operating profit, investors calculate net profit, otherwise known as net income. Net income is operating profit minus all non-operating expenses such as taxes and interest.
While a company's operating profit and net income are both Gross Loss( 毛亏损 ) important, companies with high gross profits tend to perform the best. A high amount of gross profit means that plenty of money is left over to pay for the company'Gross Loss( 毛亏损 ) s overhead costs and non-operating expenses.
Are Dividends Included in Adjusted Gross Income?
Your adjusted gross income has a big impact on your total tax bill. A high adjusted gross income can exclude you from credits and deductions you could claim with a lower income. Both Gross Loss( 毛亏损 ) ordinary and qualified dividends are included in your adjusted gross income calculation. However, ordinary and qualified dividends are taxed differently compared with other income.
Adjusted Gross Income Calculation
Adjusted gross income, or Gross Loss( 毛亏损 ) AGI, is your total income less exclusions and deductions. AGI is calculated before considering personal exemptions, dependency exemptions, and standard or itemized deductions. All income that is taxed, including ordinary dividends and qualified dividends, are included in AGI. To calculate AGI, first add all income from all sources. Next, subtract income that is not taxed, like gifts, Social Security and municipal bond interest. Last, subtract deductions for AGI. Deductions for AGI are limited and include alimony, Gross Loss( 毛亏损 ) attorney fees, pension contributions, tuition and student loan interest.
Significance of Adjusted Gross Income
AGI is significant because the Internal Revenue Service often uses it to determine if the taxpayer can claim extra deductions and credits. For example, a taxpayer must have an AGI under a certain Gross Loss( 毛亏损 ) threshold to claim educational credits and deductions for tuition and fees. Your AGI also affects how much you can claim in itemized deductions. You can only deduct medical and dental expenses Gross Loss( 毛亏损 ) that exceed 7.5 percent of your AGI, so a higher AGI decreases your deduction.
Ordinary Vs. Qualified Dividends
Your dividends are considered either ordinary dividends or qualified dividends. Qualified dividends Gross Loss( 毛亏损 ) come from shares of domestic and certain foreign corporations. To be qualified, you must have Gross Loss( 毛亏损 ) held the shares for more than 60 or 90 days, depending on whether the stock is common stock or preferred stock. Dividends from mutual funds can also be qualified, depending on Gross Loss( 毛亏损 ) Gross Loss( 毛亏损 ) the securities that make up the fund. If dividends are from a source that issues Gross Loss( 毛亏损 ) Gross Loss( 毛亏损 ) qualified dividends, it will be reported in box 1b of Form 1099-DIV.
Dividend Tax Rates
Although both ordinary and qualified dividends are included in AGI, they are taxed differently. Ordinary dividends are taxed at your regular tax rate -- the same tax rate you pay on wages, interest income and professional fees. However, you often don't have to pay as much Gross Loss( 毛亏损 ) tax on qualified dividends. For the 2013 tax year, the maximum tax rate on qualified dividends is 20 percent. In comparison, you could pay up to 39.6 percent on other Gross Loss( 毛亏损 ) Gross Loss( 毛亏损 ) Gross Loss( 毛亏损 ) taxable income.
What Are Gross Receipts?
The phrase, "gross receipts," is an accounting term often Gross Loss( 毛亏损 ) heard from accountants and financial managers. Its meaning pertains to a parameter of revenues that Gross Loss( 毛亏损 ) is often discussed when talking about the profitability of a business. Lack of understanding about this this term can make it difficult for you to comprehend discussions about revenues and receipts.
Gross means without deductions, so gross receipts refer to the total amount of considerations received Gross Loss( 毛亏损 ) Gross Loss( 毛亏损 ) in exchange for property or services sold, leased or rented during a given period before deducting costs or expenses. Except for a few exceptions, gross receipts of a business encompass all business activities that generate income.
Gross receipts include amounts received from both operating and non-operating business activities. Operating receipts result from performance of a company's core operations. Non-operating receipts are generated by activities that are not part of the company's core operations. Interest Gross Loss( 毛亏损 ) income, dividend income, real estate rents, commissions, royalties, sale of scrap, refund of tax and donations received are receipts that result from non-operating business activities.
Gross receipts present the value without deductions of operating and non-operating expenses. They do not include deductions that are part of adjustments to sales prices such as sales returns and allowances and sales discounts. Some payments received by a business are not considered in computing gross receipts such as withholding taxes collected Gross Loss( 毛亏损 ) Gross Loss( 毛亏损 ) from the employees, revenue from the sales of fixed assets, appreciation of property, loans and sales tax collected in behalf of the government.
Gross receipts should not be confused with gross sales. Gross sales specifically pertain to sales income, but gross receipts include income from non-sales sources. Receipts should not be misinterpreted to mean paper receipts such as those issued by vendors as written proof of payment upon sale of merchandise.
- Santa Monica Finance: Treasury: Definition of Gross Receipts
- AccountingCoach.com: Cash Basis of Accounting Definition
- U.S. Internal Revenue Gross Loss( 毛亏损 ) Gross Loss( 毛亏损 ) Service: Business Income
- FreeMBA.In: Receipts and Payments Methods
Raul Avenir has been writing for various websites since 2009, authoring numerous articles concentrated on business and technology. He is a technically inclined Gross Loss( 毛亏损 ) businessman experienced in construction and real estate development. Aside from being an accountant, Avenir is also a business consultant. He graduated with a degree of Bachelor of Science in business administration.