The following are extracts from an income statement for the year ended 30th June 2018: [table]
| $ Sales revenue | 12,000 Cost of sales | 6,500 Administrative expenses | 2,000 Interest received (relates to business operation/ activities) | 50 Interest paid | 200 Advertising expenses | 550 Taxation (30%) | 840 Dividends paid to shareholders | 960
[/table] The correct Earnings before interest and tax (EBIT) is

Question

BlackTom AI · Accepted Answer

The question asks for the Earnings before Interest and Tax (EBIT) from the income statement.
First, identify which items are considered operating items for EBIT:
- Sales revenue: 12,000
- Cost of sales: 6,500
- Administrative expenses: 2,000
- Advertising expenses: 550
- Interest received: 50 (noting the prompt says it relates to business operation/activities, so it is treated as part of operating income in this case)
- Interest paid: 200 (a financing item, not included in EBIT)
- Taxation and dividends are not part of EBIT either
Now, compute EBIT by starting from gross profit and subtracting operating expenses, then add any operating-interest income if treated as operating:
1) Gross profit = Sales - Cost of sales = 12,000 - 6,500 = 5,500
2) Subtract operating expenses (administrative and advertising) = 5,500 - 2,000 - 550 = 2,950
3) Add interest received (since it relates to operating activities in this context) = 2,950 + 50 = 3,000
Note: Interest paid of 200 is a financing cost and is not included in EBIT, so it is excluded from the calculation.
Now evaluate the options:
- a. $2,800: This would be too low and would imply a larger deduction for operating expenses or omitting the interest component.
- b. $1,990: This is far from the calculated figure and would require subtracting both interest and other items incorrectly.
- c. $3,000: This matches the calculation when including the 50 of interest received as part of operating income and excluding interest paid from EBIT.
- d. $2,850: This is close but still not equal to the computed 3,000 and would result from an incorrect handling of either the interest item or an operating expense.
In summary, EBIT is computed as gross profit minus operating expenses, plus the interest received (as it is treated as operating income in this scenario), while ignoring interest paid since it is a financing expense. Among the options, 3,000 aligns with that calculation.

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