CSLB Law & Business ExamBusiness FinancesEasy
A contractor is evaluating the company's financial records for the past quarter. The income statement shows total revenues of $150,000, cost of goods sold of $90,000, and operating expenses of $40,000. What is the company's net operating income (EBIT)?
- A$20,000
- B$10,000
- C$60,000
- D$110,000
Show answer & explanationAnswer & explanation
Correct answer: A. $20,000
Net operating income (EBIT) is calculated by subtracting the cost of goods sold and operating expenses from total revenues. In this case, $150,000 - $90,000 - $40,000 = $20,000.
Why the other options are wrong
- B. This would be the result if cost of goods sold was incorrectly added to operating expenses before subtracting from revenue.
- C. This represents the gross profit ($150,000 - $90,000) before operating expenses are deducted.
- D. This is an incorrect calculation that adds cost of goods sold and operating expenses, but does not correctly relate to net operating income.
Net Operating Income (EBIT)
Net Operating Income, also known as Earnings Before Interest and Taxes (EBIT), is a measure of a company's profitability from its core operations before accounting for interest and income tax expenses.
- Calculated as Revenue - Cost of Goods Sold - Operating Expenses
- Indicates operational efficiency
- Excludes non-operating items like interest and taxes
Memory trick: Operating Income: Revenue minus COGS and Operating Expenses, it's what you 'EBIT' out of operations.