Question

When Bill's business is interrupted because of a fire, he must provide a profit and loss statement to his insurer so they can determine an accurate amount of indemnification. Which three core elements from the profit and loss statement are used to calculate the net income?

A. Operating expenses, inflation, cost of goods sold
B. Total revenue, cost of goods sold, operating expenses
C. Inflation, depreciation, cost of goods sold
D. Total revenue, inflation, operating expenses

Answer 1

The three core elements from the profit and loss statement used to calculate net income are Total Revenue, Cost of Goods Sold, and Operating Expenses. These components allow the calculation of profit, which is the total revenue minus the total cost, including both COGS and operating expenses.

Step-by-step explanation:

When determining the amount of indemnification for Bill's business interruption due to a fire, his insurer will require a profit and loss statement. The three core elements from the profit and loss statement that are used to calculate net income are Total Revenue, Cost of Goods Sold (COGS), and Operating Expenses.

Total Revenue is the income received from all sources before any deductions. The Cost of Goods Sold represents the direct costs attributable to the production of the goods sold by the company. Finally, Operating Expenses include all necessary expenditures that are not directly tied to the production process, such as rent, utilities, and payroll.

The formula to determine profit, and consequently net income, is:

Profit = Total Revenue - Total Cost

The total cost includes both the Cost of Goods Sold and Operating Expenses. Inflation and depreciation are factors that may affect profits or losses, but they are not direct components used to calculate the net income in a basic profit and loss statement.