ITPEC IP October 2018 Question 68

Advertising cost — a selling expense, part of the selling, general and administrative expenses deducted to reach operating profit.

The income statement builds profit in stages:

• •Sales − cost of sales = gross profit
• •Gross profit − selling, general and administrative expenses = operating profit
• •Operating profit + non-operating income − non-operating expenses = ordinary (current) profit
• •Ordinary profit + extraordinary profit − extraordinary loss = net profit before tax
• •Net profit before tax − corporate tax and similar taxes = net profit

Advertising is a cost of selling the company's products, so it falls in the second line and affects operating profit.

Answer (a)

Why not others:

• •(b) Loss on disposal of fixed assets — an extraordinary loss, deducted after ordinary profit
• •(c) Interest paid — a financing cost, a non-operating expense deducted from operating profit to reach ordinary profit
• •(d) Corporate tax — deducted from net profit before tax, the last step

Key rule: Operating profit reflects the main business only: cost of sales and SG&A count; financing costs, one-off gains and losses, and taxes come below it.

Corporate Activities · AI-written, may contain errors