Analysis Intermediate: Understanding the Income Statement

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1.
Operating income measures how profitable a companys operations are.
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True. This ultimately assesses the competence of the company in running itself.
2.
What is a companys gross profit on sales if it earned $10 million in sales and spent $6 million on producing goods?
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$4 million. To calculate gross profit on sales, simply subtract cost of goods sold from sales.
3.
If a company has decided not to pay dividends to its stockholders this year, how will its retained earnings relate to its net earnings?
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They will be the same. Retained earnings are net earnings minus dividends. If there are no dividends, then retained earnings will not have changed from net earnings.
4.
"Other income" includes a factor that is often not named in a balance sheet. What is the name for this factor?
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Extraordinary income. Both "other income" and "extraordinary income" are income derived from outside the normal scope of a companys operations.
5.
The formula for net earnings includes interest expense. Interest expense is _______.
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The amount of interest the company pays to its creditors. This figure includes all creditors.
6.
What must be subtracted from sales to arrive at gross profits on sales?
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Cost of goods sold. Cost of goods sold is the price the company paid to produce the goods. When subtracted from sales, gross profits on sales is the result.
7.
EDIT identifies ________.
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Expenditures. Expenditures, when placed vertically and worded in a special way, will spell the acronym EDIT.