Which of the following is the correct equation for profit?

• A. Profit = Net Sales - Cost of Goods Sold - Expenses
• B. Profit = Net Sales \times Cost of Goods Sold
• C. Profit = Net Sales + Cost of Goods Sold + Expenses
• D. Profit = Net Sales - Expenses + Cost of Goods Sold

Answer: (A)

Verified step by step guidance

1. Understand the concept of profit: Profit represents the financial gain achieved when revenues exceed expenses. It is calculated by subtracting all costs and expenses from the revenue generated.
2. Identify the components of the profit equation: Net Sales refers to the total revenue after deducting returns, allowances, and discounts. Cost of Goods Sold (COGS) represents the direct costs of producing goods sold by the company. Expenses include operating costs, administrative costs, and other indirect costs.
3. Analyze the given options: Evaluate each equation to determine whether it correctly accounts for the relationship between Net Sales, COGS, and Expenses. The correct equation should subtract both COGS and Expenses from Net Sales to calculate profit.
4. Eliminate incorrect options: For example, 'Profit = Net Sales × Cost of Goods Sold' is incorrect because profit is not calculated by multiplying Net Sales and COGS. Similarly, 'Profit = Net Sales + Cost of Goods Sold + Expenses' is incorrect because it adds costs instead of subtracting them.
5. Select the correct equation: The correct formula for profit is 'Profit = Net Sales - Cost of Goods Sold - Expenses,' as it properly accounts for the deduction of all costs and expenses from Net Sales to determine the financial gain.