A company has revenue £500,000; opening inventory £40,000; purchases £280,000; closing inventory £55,000; wages £60,000; depreciation £20,000; irrecoverable debts £5,000; and loan interest £8,000. What is profit before tax?
Answer and explanation
Correct answer: D. £142,000
- Step 1: Cost of sales = £40,000 + £280,000 − £55,000 = £265,000, so gross profit = £500,000 − £265,000 = £235,000.
- Step 2: Expenses: wages £60,000 + depreciation £20,000 + irrecoverable debts £5,000 = £85,000, giving operating profit £150,000.
- Step 3: Deduct finance cost £8,000: profit before tax = £142,000.
Answer
£142,000.
Why not the others: £150,000: This is the operating profit before deducting loan interest, which is a finance cost. £32,000: This adds closing inventory to cost of sales instead of deducting it. £162,000: This leaves out depreciation, which is an expense even though it is a non-cash item.
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