ITPEC IP April 2022 Question 72

Gross profit − selling, general, and administrative expense — operating profit is what the company earns from its main business.

The income statement builds profit in stages:

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

Answer (a)

Why not others:

• •(b) — sales minus cost of sales is gross profit, one stage earlier
• •(c) — current profit adjusted for extraordinary profit and loss is current net profit before tax
• •(d) — deducting taxes from profit before tax gives current net profit, the last line

Key rule: Each profit on the income statement subtracts one more layer of cost: cost of sales, then SG&A, then non-operating items, then extraordinary items, then taxes.

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