Entrepreneurship and Small Business (ESB) V2 Certification Practice Exam

What is the formula for calculating net income?

1. Total revenue - COGS - expenses

2. Total revenue - Total expenses

3. Total assets - Total liabilities

4. Gross profit - Expenses

The correct answer is: Total revenue - COGS - expenses

The formula for calculating net income is accurately represented by subtracting total expenses from total revenue. This means that net income reflects the profit or loss that a business has made after taking into account all of its expenses relative to its revenues. While total revenue minus cost of goods sold (COGS) and expenses does seem to consider significant elements of the financial statement, it specifically outlines the gross margins rather than net income. Gross profit is defined as total revenue minus COGS, and thus does not provide a comprehensive view of income after operating expenses, taxes, and other costs have been taken into account. The correct answer focuses on the most fundamental aspects of profit calculation, as it encompasses all necessary financial variables, ensuring that net profit is determined only after all related expenses have been accounted for.