ITPEC IP October 2025 Question 71

Gross profit − selling, general, and administrative expenses — 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 expenses = operating profit
• •Operating profit + non-operating income − non-operating expenses = ordinary profit
• •Ordinary profit + extraordinary profit − extraordinary loss = profit before tax
• •Profit before tax − corporate, residential and business taxes = net profit

Answer (b)

Why not others:

• •(a) — sales minus cost of sales is gross profit, one stage earlier
• •(c) — ordinary profit adjusted for extraordinary profit and loss is profit before tax
• •(d) — deducting taxes from profit before tax gives 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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