You're starting your own business and learning how to make it profitable. Now it's time to test your knowledge of the two key financial terms you'll need to run that business: operating income and gross income.
In business operations terms, what does COGS stand for?
The cost of goods sold is considered an operating expense, which is subtracted from a company's revenue (along with the cost of depreciation) to figure out its operating income.
If you owned a sneaker company, which of these would be considered a cost of goods sold (COGS)?
COGS includes all of the costs involved in producing and shipping your product. It does not include costs like taxes or wages.
Which of the following would NOT be considered an operating expense?
Operating expenses are costs incurred during a company's day-to-day operations, such as supplies or the cost of heating the office. It doesn't include non-recurring costs, such as a lawsuit or investments.
Operating income means the same thing as EBIT, which stands for:
EBIT stands for earnings before interest and taxes . It's calculated by subtracting the cost of goods sold and administrative expenses from revenues.
Operating income is calculated as:
To calculate operating income, a company needs to take its gross income, and then subtract operating expenses like office supplies and power, as well as depreciation.
Which is a more accurate way to measure a company's profitability?
Operating income is a more accurate way to measure a company's profitability, because it takes into account not only operating expenses, but also depreciation.
What is another name for gross income?
Gross income -- which measures a company's sales revenue minus the production costs -- can also be called gross profit.
How would you calculate gross income?
Gross income is essentially a company's total revenue minus what it cost to produce that revenue.
True or false: Gross income includes salaries and office supplies.
Gross income DOES NOT include such expenses as salaries and office supplies. Those costs are figured into operating income, which is why operating income is a more accurate reflection of a company's profit.
A company with a high gross margin is said to be very:
A high gross profit margin is a sign that a company is producing its goods efficiently, because it still has a lot of profit left over after subtracting the cost of goods sold.
If a table manufacturer's revenue is $500 per table and it spends $200 to produce each table, as well as $25 in salaries and $25 in office expenses, what is the manufacturer's gross income?
Because gross income equals a company's profits minus the cost of producing its goods, this table company's gross income would be $300 per table.
What would that same table manufacturer's operating income be if it makes $500 per table and spends $200 to produce each table, $25 in salaries, and $25 in office expenses?
Operating income also takes into account all operating expenses, such as salaries and office expenses. This company's operating income would be $500 - $200 - $25 - $25 = $250.
In 2002, IBM reported the profit from the sale of a subsidiary company as operating income. Is the sale of a company considered operating income?
IBM was actually criticized for the move, which looked good in the company's income statement because it reduced the company's general and administrative expenses for the year. But because the sale was a one-time occurrence, it shouldn't have counted as operating income.
The amount of money a car manufacturing company earns from selling its automobiles is called:
Revenue is the amount of money a company earns before deducting any of its expenses--such as salaries or office supplies.
What is the term used to describe the decrease in value of a company's equipment over time?
Depreciation is the accounting term that means the reduction in value of assets over time. A company's facilities or equipment can both depreciate.
If a corporation is selling picnic baskets for $50, current sales are 10,000 units, and the costs are $10 per unit, how much will the operating income change if sales increase by another 10,000 units?
At the current number of units, the corporation's operating income will equal $400,000 -- $500,000 for sales of the picnic baskets, minus $100,000 in operating costs. Adding another 10,000 units brings sales up to $1,000,000 with $200,000 in operating costs, which works out to $800,000 in operating income--an increase of $400,000.
A company's income statement summarizes that company's expenses and revenues at a specific moment in time. True or false?
An income statement shows a company's revenues and expenses over time, not just for one brief period.
True or false? Cutting your company's prices to boost sales will increase your gross profit.
Cutting prices isn't a good business strategy when you're looking to increase your gross profit. If you're selling T-shirts for $10 each, your cost per T-shirt is $2, and you sell 200 shirts, you're looking at a gross profit of $1,600. If you cut the price of each T-shirt to $5 and then sell 400 -- double the number of t-shirts -- you're actually going to lower your gross profit to $1,200.
If a vacuum cleaner company's operating income decreases, but its gross income stays the same, the company might have:
Chances are the company was selling the same number of vacuum cleaners, but its operating income decreased because the bigger electric bill increased the company's operating costs.
If an electronics company sells $300,000 worth of televisions, its cost of goods sold is $20,000, and its operating expenses are $50,000, what is the company's operating income?
If you subtract the cost of goods sold and operating expenses from the company's sales, you'd get a total operating income of $230,000.
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