CFA Level IFinancial Statement AnalysisEasy
A retailer reports the following for the year: sales revenue $800,000; cost of goods sold $500,000; selling, general, and administrative expenses $150,000; interest expense $20,000; and income tax expense $30,000. What is the company's gross profit?
- A$300,000
- B$100,000
- C$450,000
- D$130,000
Show answer & explanationAnswer & explanation
Correct answer: A. $300,000
Gross profit equals revenue minus cost of goods sold: $800,000 − $500,000 = $300,000. SG&A, interest, and taxes are subtracted later to arrive at operating income and net income, not gross profit.
Why the other options are wrong
- B. This understates gross profit by mistakenly subtracting SG&A as well.
- C. This is operating income before interest and taxes but does not equal gross profit.
- D. This subtracts too many expense lines that belong below the gross profit line.
Gross Profit
Gross profit is revenue minus cost of goods sold, representing the profit before operating expenses are deducted.
- Gross profit = Revenue − COGS
- Appears above SG&A on a multi-step income statement
- Used to compute gross profit margin (Gross profit / Revenue)
Memory trick: Revenue minus Cost of goods = Gross profit, everything else comes later.