Which statement is TRUE with regard to gross margin?

• A. Gross Margin is Equal to Net Sales Less Cost of Goods Sold
• B. Gross Margin is the Top Line of the Income Statement
• C. Gross Margin is Another Term for Net Income
• D. Gross Margin is Equal to Revenues Less Operating Expenses

Answer: (A)

Gross margin shows profitability after covering the direct costs of producing goods. It is found by subtracting cost of goods sold from net sales. Net sales reflect revenue after returns, allowances, and discounts, while cost of goods sold are the direct costs tied to producing the sold goods. The result, gross margin, indicates how much money remains to cover operating expenses and contribute to profit.

This is not the top line, which is net sales. It’s not net income, which is after all expenses, taxes, and interest. And subtracting operating expenses from revenues gives operating income, not gross margin. For example, if net sales are 500 and COGS is 300, gross margin is 200.