gross income

Definition

Amount by which sales revenue exceeds production costs (cost of sales). Though operating income (gross income less depreciation and taxes) gives a more accurate picture of a firm's profitability, gross income provides a top-line view of a firm's production or (in case of a trading firm) sales related cost structure. It is a measure of how well (or badly) a firm is utilizing its capital, capacity, and other resources, and shows its competitive strengths and weaknesses in comparison with other firms in the same industry. A high gross income means stability in times of economic downturn because the firm can afford to cut prices; a low gross income may mean low creditworthiness or inability to fight off competition. A falling gross income shows cost of production is rising faster than the selling price, or that inventory is shrinking due to stealing or spoilage. It is allocated to employees as wages, to lenders as interest, to investors as dividends, to government as taxes, and to the firm as reinvestment. When expressed as a percentage of cost of sales, it is called gross margin. Called also gross profit or value added.