Question

Calculate earnings before interest and tax (EBIT). Cost of goods sold includes a restructuring charge of $350.0, and interest expense includes a finance penalty of $100.0.

a) EBIT = Revenue - (Cost of goods sold + Restructuring charge + Interest expense + Finance penalty)
b) EBIT = Revenue - Cost of goods sold
c) EBIT = Revenue - (Cost of goods sold + Restructuring charge)
d) EBIT = Revenue - Interest expense

Answer 1

EBIT is calculated by subtracting the cost of goods sold from revenue. The correct formula, based on the choices provided, is option B. EBIT does not incorporate interest expenses, finance penalties, or restructuring charges; although the restructuring charge may be included if it's a recurring operating expense. The correct option is B.

Step-by-step explanation:

To calculate earnings before interest and tax (EBIT), we need to consider the correct equation which incorporates relevant business expenses. The correct formula for calculating EBIT is:

EBIT = Revenue - (Cost of goods sold + Other operating expenses)

Given the choices in the question, the closest correct option for calculating EBIT would be:

b) EBIT = Revenue - Cost of goods sold

This is because EBIT is typically calculated without deducting interest expense, finance penalties, or restructuring charges. Those are costs subtracted after EBIT to determine net income. It's important to note that the restructuring charge might be an operating expense, so if it is a recurring charge and not an one-time event, it may need to be included in the calculation.

However, the finance penalty is considered a non-operating expense and should not be included in EBIT.