Which of the following statements best describes the difference between net income and gross profit?

• A. Net income is calculated before deducting operating expenses, while gross profit is calculated after all expenses are deducted.
• B. Net income and gross profit are the same and can be used interchangeably.
• C. Gross profit includes all revenues and expenses, while net income only includes sales revenue and cost of goods sold.
• D. Gross profit is calculated as net sales minus cost of goods sold, while net income is the profit remaining after all expenses, including operating expenses, interest, and taxes, are deducted from total revenues.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of gross profit. Gross profit is calculated as net sales minus the cost of goods sold (COGS). It represents the profit a company makes from its core business operations before deducting operating expenses, interest, and taxes.
2. Step 2: Understand the concept of net income. Net income is the profit remaining after all expenses, including operating expenses, interest, and taxes, are deducted from total revenues. It reflects the overall profitability of the company.
3. Step 3: Compare the two concepts. Gross profit focuses on the profitability of the company's core operations, while net income provides a broader view of the company's financial performance after accounting for all expenses.
4. Step 4: Analyze the incorrect statements. For example, the statement 'Net income is calculated before deducting operating expenses, while gross profit is calculated after all expenses are deducted' is incorrect because net income is calculated after all expenses, and gross profit is calculated before operating expenses are deducted.
5. Step 5: Confirm the correct statement. The correct statement is: 'Gross profit is calculated as net sales minus cost of goods sold, while net income is the profit remaining after all expenses, including operating expenses, interest, and taxes, are deducted from total revenues.' This accurately describes the difference between gross profit and net income.