What is net profit?

• A. Gross profits minus all other expenditures
• B. Revenue minus cost of sales
• C. Total income minus total expenditure
• D. Profit before tax deductions

Answer: (A)

Net profit refers to the amount of money that remains after all expenses have been deducted from revenue. It is an essential indicator of a business's financial health, reflecting the actual profit made after accounting for every expenditure.

The correct answer states that net profit is gross profits minus all other expenditures. This explanation aligns with the standard accounting definition where gross profit (which is revenue minus the cost of goods sold) is not sufficient by itself. To reach net profit, it is necessary to subtract operating expenses, interest, taxes, and any other non-operational costs from gross profit. This final figure provides a clearer picture of the company's profitability because it considers all financial outflows incurred during the period in question.

While the other answers touch upon aspects of profitability, they do not encapsulate the complete process that leads to net profit. Revenue minus the cost of sales, for example, would only provide gross profit rather than the full calculation leading to net profit. The definition mentioning total income minus total expenditure is incorrect because it lacks the distinction necessary to specify that it follows subtracting the costs directly related to sales (the cost of goods sold) first. Lastly, profit before tax deductions refers simply to the profit calculated before tax is considered, which again does not fully capture all expenditures