A contractor's income statement shows: Revenue $850,000, Cost of Goods Sold $595,000, Operating Expenses $180,000, Interest Expense $12,000. What is the net income?
Correct Answer
C) $63,000
Net Income = Revenue - Cost of Goods Sold - Operating Expenses - Interest Expense. $850,000 - $595,000 - $180,000 - $12,000 = $63,000.
Why This Is the Correct Answer
Option A is correct because net income is calculated by subtracting all expenses from total revenue. The formula is: Net Income = Revenue - Cost of Goods Sold - Operating Expenses - Interest Expense. When we apply this formula: $850,000 - $595,000 - $180,000 - $12,000 = $63,000. This represents the contractor's actual profit after all costs and expenses have been deducted.
Why the Other Options Are Wrong
Option A: $255,000
This answer ($267,000) only subtracts operating expenses and interest expense from revenue ($850,000 - $180,000 - $12,000 = $658,000), but this calculation is also mathematically incorrect and ignores Cost of Goods Sold entirely.
Option D: $75,000
This answer ($75,000) incorrectly omits the interest expense from the calculation, resulting in $850,000 - $595,000 - $180,000 = $75,000, but failing to subtract the $12,000 interest expense.
Memory Technique
Remember 'RCOI' - Revenue minus Cost of goods sold minus Operating expenses minus Interest expense equals net income. Think 'Really Cool Operations Income' to remember the order.
Reference Hint
Business and Finance for Contractors chapter on Financial Statements and Income Statement Analysis
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