Certified Paraoptometric (CPO) Practice Exam 2025

How is 'Gross Profit' defined?

1. The total revenue after all expenses have been deducted

2. The percentage of business income before expenses

3. The net worth of the business

4. The operating income excluding taxes

The correct answer is: The percentage of business income before expenses

Gross Profit is defined as the total revenue from sales minus the cost of goods sold (COGS). This calculation measures the efficiency of a company in producing and selling its products. It reflects the company's ability to generate profit from its core operations before considering overhead costs and other expenses such as taxes, salaries, and administrative expenses. Option B references the percentage of business income before expenses, which generally relates more accurately to a broader context, but Gross Profit itself is not defined that way. In essence, Gross Profit provides a clearer view of profitability by focusing specifically on the relationship between revenue and the direct costs attributable to the products or services sold. Understanding Gross Profit helps in assessing how well a company utilizes its resources to produce sales while controlling related costs.