ITPEC IP October 2023 Question 72

(Sales) − (Cost of sales) — gross profit is the first profit on the income statement.

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 expenses = ordinary (current) profit
• •Ordinary profit + extraordinary profit − extraordinary loss = current net profit before tax
• •Net profit before tax − corporate, local and business taxes = current net profit

Answer (a)

Why not others:

• •(b) — adding non-operating income to operating profit and deducting non-operating expenses gives ordinary profit
• •(c) — ordinary profit adjusted for extraordinary profit and loss gives current net profit before tax
• •(d) — deducting taxes from net 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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