Question

question 2

finn is interested in taking over a small business, but he wants to pay a fair price for it, so he consults its income statements.

how can finn determine the companys overall profitability in each quarter of the previous year?

• by calculating total revenue minus cost of goods sold
• by calculating total revenue minus taxes paid
• by calculating operating revenue minus operating expenses
• by calculating total revenue minus total expenses

Explanation:

Understand the goal

The question asks how Finn can determine a company's overall profitability in each quarter of the previous year using its income statements.

Analyze the options

• By calculating total revenue minus cost of goods sold: This yields gross profit, which only measures manufacturing or direct product profitability, not overall profitability.
• By calculating total revenue minus taxes paid: This is not a standard financial metric and ignores operating and interest expenses.
• By calculating operating revenue minus operating expenses: This yields operating income (EBIT), which excludes non-operating items, interest, and taxes.
• By calculating total revenue minus total expenses: This yields net income (or net profit), which represents the final bottom-line profitability of the business after all costs, interest, and taxes are accounted for.

Determine overall profitability

Overall profitability is best represented by net income, which is calculated as total revenue minus total expenses.

Answer:

• By calculating total revenue minus cost of goods sold
• By calculating total revenue minus taxes paid
• By calculating operating revenue minus operating expenses
• By calculating total revenue minus total expenses (Correct answer)