Drill 15 ·
AP Business with Personal Finance: Income Statement (Drill 15) is a practice drill. It contains 5 original questions created by Brian Stewart, a Barron's test prep author with over 20 years of tutoring experience.
Practice reading a comparative income statement: identifying line items, calculating gross and net profit margins, and interpreting changes in profitability across two years. This drill uses an invented company and original figures.
Ridgehaven Outfitters, Inc. is a retailer of outdoor gear. Each year it prepares a comparative income statement for its owners and lenders. The statement below reports two years of results, in thousands of dollars. Two lines have been left unlabeled.
Ridgehaven Outfitters, Inc. -- Comparative Income Statement (in thousands of dollars)
| Line | Item | 2024 | 2025 |
|---|---|---|---|
| 1 | Revenue | 400 | 500 |
| 2 | Cost of Goods Sold | (240) | (300) |
| 3 | Gross Profit | 160 | 200 |
| 4 | Operating Expenses | (110) | (150) |
| 5 | Line 5 | 50 | 50 |
| 6 | Interest and Taxes | (20) | (18) |
| 7 | Line 7 | 30 | 32 |
Question 1. Which income statement category does Line 5 represent?
Explanation: The answer is operating profit. Line 5 equals gross profit minus operating expenses (160 - 110 = 50 in 2024), which is the definition of operating profit. Gross profit is already shown on Line 3, so it cannot also be Line 5. Net profit comes after interest and taxes are subtracted and appears lower on the statement as Line 7. Retained earnings is a balance sheet figure, not a line on the income statement.
Question 2. According to the table, what was Ridgehaven's gross profit margin in 2025?
Explanation: The answer is 40%. Gross profit margin is gross profit divided by revenue: 200 / 500 = 0.40, or 40%. The 50% choice ignores cost of goods sold and divides gross profit by something other than revenue. The 60% figure is the share of revenue taken up by cost of goods sold (300 / 500), not the gross margin. The 30% choice does not correspond to any ratio supported by the data.
Question 3. What was Ridgehaven's net profit margin in 2024?
Explanation: The answer is 7.5%. Net profit margin is net profit divided by revenue: 30 / 400 = 0.075, or 7.5%. The 12.5% choice uses operating profit (50 / 400) instead of net profit. The 40% choice is the gross profit margin (160 / 400). The 60% choice is the share of revenue taken by cost of goods sold (240 / 400).
Question 4. Operating profit stayed at 50 in both years even though revenue rose from 400 to 500. Which of the following best explains why?
Explanation: The answer is that the increase in gross profit was offset by an equal increase in operating expenses. Gross profit rose from 160 to 200, an increase of 40, but operating expenses also rose from 110 to 150, the same 40, so the two changes canceled and operating profit held at 50. Revenue did not fall; the table shows it rising from 400 to 500. Cost of goods sold rose rather than fell. Interest and taxes actually decreased, from 20 to 18, and sit below operating profit, so they cannot explain why it stayed flat.
Question 5. Which conclusion about Ridgehaven is best supported by the two years of data?
Explanation: The answer is that revenue grew while the gross profit margin stayed flat. Revenue rose from 400 to 500, and the gross profit margin was 40% in both years (160 / 400 and 200 / 500). The business remained profitable, posting net profit of 30 and 32, so it did not become unprofitable. Cost of goods sold held steady at 60% of revenue (240 / 400 and 300 / 500), so its share did not shrink. Operating expenses rose from 110 to 150 rather than falling.