ITPEC FE Morning October 2020 Question 79

Japanese Income Statement Structure — identify which profit level a formula represents.

In Japanese corporate accounting, the income statement has a specific hierarchy of profit levels:

1. Sales profit = Sales − Cost of sales
2. Operating profit = Sales profit − Operating expenses
3. Ordinary profit = Operating profit + Non-operating revenue − Non-operating expense
4. Extraordinary profit = Ordinary profit ± Extraordinary gains/losses
5. Net profit before taxes = after extraordinary items
6. Current net profit = after taxes

The formula Operating profit + (Non-operating revenue − Non-operating expense) matches step 3: Ordinary profit (d).

Ordinary profit captures the company's regular recurring performance — both from core operations and routine financial activities (interest, dividends) — but excludes one-time extraordinary events.

Why not others:
- (a) Current net profit is the final bottom line after taxes
- (b) Current net profit before taxes comes after adding/subtracting extraordinary items
- (c) Extraordinary profit involves unusual one-time gains/losses, not part of this formula

Key rule: Operating profit + non-operating items (interest, dividends) = Ordinary profit — the "everyday" profit before any surprises.

AI-generated — may contain errors