CFA Level IFinancial Statement AnalysisEasy
A company reports the following for the year: Sales Revenue $1,500,000, Cost of Goods Sold $900,000, Operating Expenses $300,000, Interest Expense $50,000, and Tax Expense $75,000. What is the company's Net Income?
- A$275,000
- B$175,000
- C$225,000
- D$300,000
Show answer & explanationAnswer & explanation
Correct answer: B. $175,000
Net income is calculated by taking sales revenue and subtracting cost of goods sold, operating expenses, interest expense, and tax expense. This follows the standard structure of an income statement.
Why the other options are wrong
- A. This incorrectly calculates income before tax but after COGS and operating expenses.
- C. This incorrectly includes only COGS and operating expenses, neglecting interest and tax.
- D. This incorrectly calculates operating income, neglecting interest and tax expenses.
Net Income Calculation
Net income is the final profit remaining after all expenses, including costs of goods sold, operating expenses, interest, and taxes, have been deducted from revenue.
- Represents the 'bottom line' of the income statement.
- Crucial for assessing a company's profitability and financial health.
- Calculated as Revenue - COGS - Operating Expenses - Interest Expense - Tax Expense.
Memory trick: Revenue's journey down, past costs and taxes, to find the final gain.