Which of the following is true concerning the preparation of financial statements?
a. The cost of goods sold is added to sales
b.The cost of goods sold is deducted from sales
c. The tax and interest are deducted before income profit is reported
d. The gross profit is found by deducting operating expenses from sales
To determine which statement is true concerning the preparation of financial statements, we need to understand the basic structure of financial statements.
Financial statements are reports that summarize the financial activities and performance of a business. The most common financial statements are the income statement, balance sheet, and cash flow statement.
Now, let's analyze each statement:
a. The cost of goods sold is added to sales.
This statement is incorrect. The cost of goods sold (COGS) represents the direct costs incurred in producing or purchasing the goods sold by a company. It is subtracted from sales to calculate the gross profit.
b. The cost of goods sold is deducted from sales.
This statement is correct. As mentioned earlier, the cost of goods sold is subtracted from sales to calculate the gross profit. This reflects the direct costs associated with the goods sold.
c. The tax and interest are deducted before income profit is reported.
This statement is partially correct. Taxes and interest expenses are deducted from the gross profit to calculate the net income. However, it's important to note that these deductions occur after the calculation of operating expenses, not before.
d. The gross profit is found by deducting operating expenses from sales.
This statement is incorrect. The gross profit is found by deducting the cost of goods sold from sales, not operating expenses. Operating expenses, such as salaries, rent, and utilities, are subtracted from the gross profit to calculate the operating income.
Therefore, the correct answer is:
b. The cost of goods sold is deducted from sales.