What two elements are necessary to calculate gross profit?

To calculate gross profit, net sales and cost of goods sold are essential elements. Gross profit is determined by subtracting the cost of goods sold (COGS) from net sales. Net sales represent the revenue generated from sales after accounting for returns, allowances, and discounts. Cost of goods sold includes all costs directly related to the production of goods sold by the company.

The formula for gross profit is:

Gross Profit = Net Sales - Cost of Goods Sold

This calculation helps a business determine how efficiently it is producing and selling its products, which is crucial for financial analysis and decision-making. Other elements, such as expenses or investments, do not directly factor into this calculation and therefore do not contribute to understanding gross profit.