The correct answer is d: Interest Expense. The expense that is causing lower profitability is the Interest Expense.
The fee incurred by a business for borrowed cash is known as an interest expense. On the income statement, it is listed as a non-operating expense. It stands for the interest due on all borrowings, including bonds, loans, convertible debt, and credit lines. In essence, it is determined by multiplying the interest rate by the debt's outstanding principal. Instead of the amount of interest paid over the reporting period, interest expense on the income statement shows interest accrued during that time. While interest costs are tax deductible for businesses, they may not be in the case of an individual, depending on their jurisdiction and the purpose of the loan.
Since there are typically lags between interest accruing and interest paid, interest expense frequently appears as a line item on a company's balance sheet.
Comparative income statements for South Drive Company for Year 2 and Year 1 are given below.
................................................Year 2.......................... Year 1
Sales ....................................900,000 .......................500,000
Cost of goods sold ..........(432,000) ......................(240,000)
Gross profit on sales ........468,000 ........................260,000
Wage expense ..................(54,000) .......................(30,000)
Rent expense ....................(90,000) .......................(50,000)
Operating income .............324,000 ........................180,000
Interest expense............... (80,000)........................ (30,000)
Net income........................ 244,000 ..........................150,000
Return on sales for South Drive is lower in Year 2 than in Year 1. What expense is causing this lower profitability?
a. Cost of Goods Sold
b. Wage Expense
c. Rent Expense
d. Interest Expense
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