Drill 18 ·
AP Business with Personal Finance: Income Statement (Drill 18) 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 with a numbered income statement that hides several lines: identifying categories, calculating net profit margin, applying a hypothetical expense change, and choosing the clearest investor-facing statement of profitability. This drill uses an invented company and original figures.
Marisol's Bakery, Inc. sells baked goods to cafes. Its income statement is shown below, in thousands of dollars. Several lines are unlabeled.
| Line | Item | Amount |
|---|---|---|
| 1 | Revenue | 250 |
| 2 | Cost of Goods Sold | (150) |
| 3 | Line 3 | 100 |
| 4 | Operating Expenses | (60) |
| 5 | Line 5 | 40 |
| 6 | Interest and Taxes | (10) |
| 7 | Line 7 | 30 |
Question 1. Which income statement category does Line 3 represent?
Explanation: The answer is gross profit. Line 3 sits directly below revenue and cost of goods sold, and equals revenue minus the cost of goods sold (250 minus 150 equals 100), which is the definition of gross profit. Revenue is Line 1, the starting figure. Operating profit comes after operating expenses are subtracted and appears lower as Line 5. Net profit is the final line after interest and taxes, shown as Line 7.
Question 2. Which income statement category does Line 5 represent?
Explanation: The answer is operating profit. Line 5 equals gross profit minus operating expenses, 100 minus 60 equals 40, which defines operating profit. Gross profit is Line 3. Net profit is Line 7, after interest and taxes. Revenue is Line 1.
Question 3. What was Marisol's net profit margin?
Explanation: The answer is 12%. Net profit margin is net profit divided by revenue: 30 divided by 250 equals 0.12. The 40% figure is the gross profit margin. The 60% figure is the share of revenue taken by cost of goods sold. The 30% choice mistakes the net profit dollar figure for a percentage.
Question 4. Suppose Marisol's operating expenses rose to 80 while revenue and cost of goods sold stayed the same. What would the new operating profit be?
Explanation: The answer is 20. Operating profit is gross profit minus operating expenses. Gross profit stays at 100, and with operating expenses now 80, operating profit becomes 100 minus 80, or 20. The 40 figure is the original operating profit. The 100 figure is gross profit. The 30 figure is the original net profit.
Question 5. Marisol wants to tell a potential investor, in one sentence, how profitable the bakery is relative to its sales. Which statement is best supported by the data?
Explanation: The answer is that the bakery kept 12 cents of net profit for every dollar of sales. That is the net profit margin, 30 divided by 250, and it expresses profitability relative to sales. The other statements are accurate but describe the size of revenue or specific costs, not how much profit the bakery earns per dollar of sales.