What is the relationship between net revenue and cost of sales?

The relationship between net revenue and cost of sales is best described by gross profit. Gross profit is calculated by subtracting the cost of sales (or cost of goods sold) from net revenue (which is total revenue minus returns, allowances, and discounts). This calculation reflects the amount of money a company retains from sales after covering the direct costs associated with the production of its goods or services.

Understanding gross profit is crucial for evaluating a business's efficiency in managing production costs relative to its sales. It provides insight into how well a company is generating profit from its core business activities, which is fundamental for assessing overall business performance.