Question

Which of the following statements about profit measurement in financial accounting is INCORRECT?

Q: Answer-Which of the following statements about profit measurement in financial accounting is INCORRECT?

This is INCORRECT. EBIT Earnings Before Interest and Tax by definition, interest has NOT been deducted. EBIT is calculated as Gross Profit minus Operating Expenses and Depreciation, but BEFORE interest. It is EBT Earnings Before Tax that reflects the impact of interest and therefore capital structure. EBIT is specifically used to measure operating performance independently of financing decisions.

A Gross Profit is calculated by deducting Cost of Goods Sold from Net Revenue, and does not account for operating expenses such as selling, general, and administrative costs.

B EBITDA is a proxy for operating cash flow but can overstate it when working capital requirements are rising.

C Net Profit After Tax represents residual earnings available to equity shareholders after meeting all obligations including preference dividends.

D Operating Profit (EBIT) includes the effect of capital structure decisions since it is calculated after deducting interest expense from gross profit.

E Depreciation, though a non-cash charge, reduces taxable profit and therefore has a real cash flow benefit equal to depreciation multiplied by the applicable tax rate.

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Which of the following statements about profit measurement in financial accounting is INCORRECT?

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