- CFA Exams
- 2021 CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 21. Understanding Income Statements
- Subject 8. Analysis of the Income Statement

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**CFA Practice Question**

You are given the following information about a firm:

Cost of Goods Sold = $600

Operating Expenses = $200

Interest Expenses = $50

Tax Rate = 34%

Net Sales = $1,000

Cost of Goods Sold = $600

Operating Expenses = $200

Interest Expenses = $50

Tax Rate = 34%

What are the gross and operating profit margins?

Correct Answer: gross operating margin: 40%; operating profit margin: 20%

Operating profit margin = ($1000 net sales - $600 COGS - $200 operating expenses)/$1000 net sales = $200/$1000 = 0.2

Gross profit margin = ($1000 net sales - $600 COGS)/$1000 net sales = 400/1000 = 0.4

Operating profit margin = ($1000 net sales - $600 COGS - $200 operating expenses)/$1000 net sales = $200/$1000 = 0.2

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**User Contributed Comments**
7

User |
Comment |
---|---|

kalps |
Operating profit is before Interest and Tax (BEWARE THIS IS different to the cash flow statement where interest is included as part of an operating flow !!!!) |

morpheus918 |
Thanks for the heads up. That's the type of difference that could be hard to remember. |

haarlemmer |
operating profit=EBIT (interest&tax) |

bobert |
Had it asked for Net Profit margin it would have been 13.2% right? (Net Sales - COGS - Op Exp )*(1-tax rate) = 132/Net Sales |

MattyBo |
I believe Net Profit margin would also include a deduction for interest expenses. (Net sales - COGS - Op Exp - Interest Exp - Taxes) = 99 / Net Sales = 9.9% |

moneyguy |
I calculated net profit margin as shown by Matty. OPERATING profit margin, not NET profit margin. At test speed, it may be easy to make mistakes like this. |

johntan1979 |
Operating profit = EBIT i.e. BEFORE interest and taxes Will never go wrong if this is grounded in your head. |