Which statement correctly describes the relationship between operating profit and gross profit?

Which statement correctly describes the relationship between operating profit and gross profit?

• A. Net Income minus Taxes
• B. Gross Profit minus Operating Expenses
• C. Sales Revenue minus Operating Expenses
• D. Cash Flow from Operations

Answer: (B)

The relationship being tested is how operating profit is derived from gross profit. Gross profit is the revenue left after subtracting the cost of goods sold, reflecting production efficiency. To get operating profit, you subtract operating expenses from gross profit. Those operating expenses include selling, general and administrative costs, and typically depreciation and amortization. This gives the profit generated from core operations before interest and taxes, i.e., EBIT. So the statement that gross profit minus operating expenses equals operating profit is the best description. Net income minus taxes would give after-tax earnings, not operating profit. Cash flow from operations is a cash flow measure, not an accounting profit figure. Sales revenue minus operating expenses would mix revenue with costs without properly accounting for the cost of goods sold first, so it doesn’t isolate core operating profitability.

The relationship being tested is how operating profit is derived from gross profit. Gross profit is the revenue left after subtracting the cost of goods sold, reflecting production efficiency. To get operating profit, you subtract operating expenses from gross profit. Those operating expenses include selling, general and administrative costs, and typically depreciation and amortization. This gives the profit generated from core operations before interest and taxes, i.e., EBIT.

So the statement that gross profit minus operating expenses equals operating profit is the best description. Net income minus taxes would give after-tax earnings, not operating profit. Cash flow from operations is a cash flow measure, not an accounting profit figure. Sales revenue minus operating expenses would mix revenue with costs without properly accounting for the cost of goods sold first, so it doesn’t isolate core operating profitability.