How do gross profits, operating income, and net income relate to the a

How do gross profits, operating income, and net income relate to the areas of business activity reported in the
income statement?

What will be an ideal response?

ANSWER

The income statement begins with sales or revenue, from which we subtract the cost of goods sold (the cost of
producing or acquiring the product or service to be sold) to yield gross profits. 1. Sales (revenues), which is equal to the
selling price of the products or services to be sold times the number of units sold (selling price * units sold = total sales)
2. Cost of goods sold, which is the cost of producing or acquiring the goods or services that were sold 3. Operating
expenses, which include: a. Marketing and selling expenses (the expenses related to marketing, selling, and
distributing the products or services) b. The firm’s overhead expenses (general and administrative expenses, and
depreciation expense).