When preparing a company's Statement of Profit or Loss, financial accountants present line items and key profit figures in a standardized vertical structure. How should the following financial deductions and intermediate totals be ordered from the top of the statement down to the final profit for the year?
- 1Deducting Cost of Sales from Revenue to compute Gross Profit
- 2Subtracting operating expenses from Gross Profit to obtain Profit from Operations
- 3Deducting finance costs (such as debenture interest) to determine Profit Before Tax
- 4Subtracting corporate income tax expense from Profit Before Tax to arrive at Profit After Tax
Answer
The correct presentation sequence in a company Statement of Profit or Loss is: (1) Deducting Cost of Sales from Revenue to compute Gross Profit, (2) Subtracting operating expenses from Gross Profit to obtain Profit from Operations, (3) Deducting finance costs (such as debenture interest) to determine Profit Before Tax, and (4) Subtracting corporate income tax expense from Profit Before Tax to arrive at Profit After Tax.
The standard vertical format of a company's Statement of Profit or Loss follows a logical sequence: Revenue minus Cost of Sales yields Gross Profit; deducting operating expenses gives Profit from Operations; deducting finance costs like debenture interest yields Profit Before Tax; and subtracting income tax expense gives Profit After Tax.
Step-by-Step Solution
Key Concept
Structure of Company Statement of Profit or Loss