Question

Assume that sales revenue are $450,000, sales discounts are $10,000, net income is $35,000, and cost of goods sold is $320,000. How much are gross profit and operating expenses, respectively?

$120,000 and $95,000

$120,000 and $85,000

$130,000 and $85,000

$130,000 and $95,000

Answer 1

To arrive at gross profit, you need to subtract the cost of goods sold from net sales revenue i.e,

• gross profit = net sales revenue -  cost of goods sold.

[net sales revenue = gross sales - sales returns - sales discounts]

Here, ( gross sales revenue = 450,000 , sales discounts = 10,000 , cost of goods sold = 320,000 , net income= 35,000)

Net sales revenue = 450,000 - 10,000 = 440,000

Gross income = 440,000 - 320,000 = 120,000

• operating expenses =gross income - net income

Here,

operating expenses = 120,000 - 35,000 = 85,000

NOTES :

1) operating expenses are those which are not directly attributable to the production of goods and thus not included in cost of production . They are expenses incurred to run the business and are indirect costs .

2) gross profit includes operating expenses.

3) Net profit is attained after deducting operating expenses from gross profit.