ITPEC IP October 2020 Question 71

Topic: Corporate Activities

When income statements for the previous term and the current term are compared, which of the following is an appropriate description of a change from the previous term to the current term?

Unit: million yen

AccountPrevious TermCurrent Term
Net sales7,5009,000
Cost of sales6,0007,000
Selling, general and administrative expenses1,0001,000
Non-operating income160150
Non-operating expenses11050
Extraordinary profits100
Extraordinary losses100
Taxes250500

Explanation

Ordinary profit doubled — from 550 to 1,100 million yen once each profit is worked down the income statement.

Profit (million yen)PreviousCurrent
Gross profit = sales − cost of sales1,5002,000
Operating profit = gross − SG&A5001,000
Ordinary profit = operating + non-operating income − non-operating expenses5501,100
Before tax = ordinary + extraordinary profits − losses5501,100
Net income = before tax − taxes300600

Ordinary profit: 500 + 160 − 110 = 550 and 1,000 + 150 − 50 = 1,100, exactly twice.

Answer (c)

Why not others:

  • •(a) — gross profit rose by 2,000 − 1,500 = 500; 1,500 is the rise in net sales (and last term's gross profit)
  • •(b) — operating profit rose from 500 to 1,000, an increase of 100%, not 50%
  • •(d) — net income rose from 300 to 600; it doubled rather than staying unchanged

Key rule: Gross → operating → ordinary → before tax → net: each step removes one layer (cost of sales, SG&A, non-operating items, extraordinary items, taxes).

Corporate Activities · AI-written, may contain errors

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