Question

Franco and Giada are trying to calculate their gross income. Which of the following items should they exclude from their gross income? 1. $60,000 in cash inherited by Giada from her mother. 2. $20,000 borrowed by Franco and Giada from First City Bank. 3. $12,000 gain from the sale of Franco and Giada’s boat. 4. $400 of interest earned on a loan made by Franco to his cousin Vinnie.

Answer 1

Answer:

1 and 2

Explanation:

Gross profit is earning a business makes from its normal operation before considering operating expenses. It is calculated by subtracting direct costs from the revenues. Direct costs are the expenses incurred in acquiring the goods and services sold to customers. Revenue from normal business operations is the income from the sale of goods and services, and other business-related activities.

For Franco and Giada, they should not include items 1 and 2 in gross profits.

• Item 1 is money inherited. It is income but not from the business operations.
• Item 2 is a loan a bank loan. Loans are not considered in the income statement but are featured in the balance sheet.

Items 3 and 4 will be featured in the gross profit calculation. Item 3 is an income from a sale, while item 4 is a miscellaneous income from a loan issued out.