Certified Financial Management Specialist Practice Exam

What is the result of operating profit calculation?

1. Revenue minus total expenses

2. Gross profit minus indirect expenses

3. Net income minus interest

4. Revenue minus direct costs only

The correct answer is: Gross profit minus indirect expenses

The correct choice relates to the concept of operating profit, which is specifically defined as the profit realized from a business's normal operations. This calculation is crucial for assessing the profitability derived from core business activities, excluding any ancillary income or expenses, such as income from investments or interest expenses. Operating profit is calculated by taking the gross profit—revenue minus the cost of goods sold— and then subtracting the operating expenses, which include indirect expenses such as selling, general and administrative expenses but do not factor in interest or taxes. This distinction is essential, as it allows businesses to focus on their operational efficiency and performance without the influence of their capital structure or tax situation. Therefore, the choice indicating that operating profit is derived from gross profit minus indirect expenses accurately captures this financial measure, making it a fundamental concept in financial analysis and management. Understanding operating profit is crucial for stakeholders as it provides insights into a company’s operational effectiveness and profitability, distinguishing it from net income, which takes a broader range of factors into account.