Which financial statement is prepared to calculate gross profit?

Which financial statement is prepared to calculate gross profit?

• A. Ratio analysis
• B. The profit and loss account
• C. The balance sheet
• D. The trading account

Answer: (D)

Calculating gross profit focuses on the relationship between sales revenue and the cost of goods sold. In the traditional financial statements, the trading account is the one that lays out sales separately from the cost of goods sold (opening stock, purchases, and any production costs, adjusted for closing stock). When you subtract the cost of goods sold from sales, you arrive at gross profit (or gross loss). The profit and loss account then takes that gross profit and subtracts operating expenses to show net profit. The balance sheet shows what the business owns and owes at a moment in time, not profitability. Ratio analysis is a tool for interpreting financial data, not a statement itself. So the trading account is the statement prepared to calculate gross profit.

Calculating gross profit focuses on the relationship between sales revenue and the cost of goods sold. In the traditional financial statements, the trading account is the one that lays out sales separately from the cost of goods sold (opening stock, purchases, and any production costs, adjusted for closing stock). When you subtract the cost of goods sold from sales, you arrive at gross profit (or gross loss). The profit and loss account then takes that gross profit and subtracts operating expenses to show net profit. The balance sheet shows what the business owns and owes at a moment in time, not profitability. Ratio analysis is a tool for interpreting financial data, not a statement itself. So the trading account is the statement prepared to calculate gross profit.