Differentiate between gross profit and net profit.

The distinction between gross profit and net profit is fundamental in understanding a company's financial performance. Gross profit represents the total revenue a company generates from sales minus the cost of goods sold (COGS). This figure provides insight into how efficiently a company is producing or procuring its goods and managing its direct costs.

On the other hand, net profit encompasses a broader financial metric. It is calculated by taking total revenue and subtracting not only the cost of goods sold but also all operating expenses, interest, taxes, and any other costs. This means net profit reflects the overall profitability of a business after all expenses have been accounted for, offering a more comprehensive view of its financial health.

Thus, the reason the chosen answer is correct lies in the definitions and calculations of the two profits: gross profit is solely focused on revenue and direct production costs, while net profit accounts for the complete range of expenditures incurred by the business. This distinction is crucial for stakeholders looking to assess financial performance on both operational efficiency and overall profitability.