The income statement starts with the following equation:

Revenue - Cost of Goods Sold = Gross Profit 🧮

As you learned before, revenue is the money a company receives from selling its product or service 💰

For example, let’s say a company sells T-shirts 👕

If it sells 1,000 T-shirts for $10 each, the company has made 1,000 x $10 = $10,000 in revenue

Cost of Goods Sold or COGS, are the direct costs associated with producing and delivering the goods or services sold by the company 🔩

Consider the T-Shirt company:

The expenses associated with producing each T-shirt, such as cotton, stitching, and packaging, are considered COGS 🧵

However, COGS only includes direct costs of producing a product or service, not indirect costs like marketing, sales, or even product development 🚫

By subtracting COGS from revenue, we get Gross Profit

Gross Profit is important because it is the maximum amount of money a company can earn if it has no other costs 🏆

For our T-shirt company, let’s say that each T-shirt costs $4 to produce, so selling 1,000 shirts incurs COGS of:

1,000 x $4 = $4,000

Taking the revenue of $10,000 and subtracting $4,000 of COGS would give us $6,000 of Gross Profit 💡

But COGS are not the only expense for any company, so Gross Profit is not its "real" profit!

Let's look at the next equation in the next lesson 🔍