ACC 240 Describe The Difference Between Gross Profit and Income From Operations.

ACC 240 Describe The Difference Between Gross Profit and Income From Operations.

Describe the difference between gross profit and income from operations. Why would a company be concerned with gross profit rather than just overall income from operations?

ACC 240 Topic 4 DQ 2

Explain what is meant by the term “sustainable income.” Why is it important to distinguish between sustainable income and actual net income? Is one more important than the other? Please explain.

Gross Profit and Operating Income
Both the operating income and gross profit show the income earned by a company. However, the two metrics have different credits and deductions considered during their calculations. Both systems are essential in analyzing a company’s financial well being.

Gross Profit
Gross profit is the income earned by a company after deducting the direct costs of producing its products. For example, if you sold $100 worth of widgets and it cost $75 for your factory to produce them, then your gross profit would be $25. Gross profit is calculated as:

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Gross profit = Revenue – Cost of Goods Sold

Revenue is the total amount of sales generated in a period. You’ll often hear analysts refer to revenue as the top line for a company and that’s because it sits at the top of the income statement. As you work your way down the income statement, costs are subtracted from revenue to ultimately calculate net income or the bottom line.

The cost of goods sold (COGS) is the direct cost associated with producing goods. COGS includes both direct labor costs, and any costs of materials used in producing or manufacturing a company’s products.

Gross profit measures how well a company generates profit from its direct labor and direct materials. Gross profit doesn’t include non-production costs such as administrative costs for the corporate office. Only the profit and costs associated with the production facility are included in the calculation. Some of the costs could include:

Operating Income
Operating income is a company’s profit after subtracting operating expenses or the costs of running the daily business. For investors, the operating income helps separate out the earnings for the company’s operating performance by excluding interest and taxes, which are deducted later to arrive at net income.

These operating expenses include selling, general and administrative expenses (SG&A), depreciation, and amortization, and other operating expenses. Operating income does not include money earned from investments in other companies or non-operating income, taxes, and interest expenses.

Also, any nonrecurring items are not included, such as cash paid for a lawsuit settlement. Operating income can also be calculated by deducting operating expenses from gross profit.

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