Gross profit represents the merchandising profit of a company is true?

Question

Gross profit represents the merchandising profit of a company is true?

Answer 1

Yes. Gross profit = Sales - COGS. But a gross profit does not guarantee a net profit. It all depends on how much operating expenses are.

Answer 2

What Sandy wrote is almost correct. But there is GAAP profit and Cash flow profit, which are different beasts because GAAP profits do not reflect actual cash inflows and outflows, only what ever portion can be applied against that year's revenues.

For example, let's say a company spends $100 to build a factory, which is going to last them 10 years. It then buys raw materials for $10, spends $5 on processing them into finished goods and then sells the goods for $100.  The gross profit is $100 - $15 = $85.

Now, let's assume they spent $20 on sales and marketing, $10 on R&D, $20 on general and administrative costs and $10 on factory depreciation for year 1. As Sandy pointed out, net income is $85 - $60 = $25

So per GAAP principles, the company is profitable. But in reality, in year 1, they spent $100+$10+$5+$20+$10+$20 = $165 to launch their business and earned $100. So on cash flow basis they made a loss of $65.

Only in year 2, when they earn another $100 (assuming flat sales), will they make a cash flow profit of $35 finally.

Any budding entrepreneur needs to keep these differences in mind. There are various other sources of income that affect cash inflows and outflows - amortization, receivables, deliverables, accrued liabilities etc. etc. If you really want to learn more, I'd suggest starting with a basic textbook like Stickney and Weil or similar. You may also want to look into Cost Accounting, a totally different approach that looks at how companies can/should allocate costs internally.

This was a simple overview. If you have further questions, feel free to drop me an email. Good luck!