Difficulty: Easy

Average Score: 86%

Which of the following is true of gross and net income

Rationale

Gross income is determined before expenses are deducted.

Gross income represents the total earnings of an individual or business before any expenses, taxes, or deductions are considered. This foundational financial metric provides a clear picture of income generation, while net income reflects the amount remaining after all expenses have been subtracted.

A (Gross income is calculated after expenses have been paid) YOUR ANSWER

This statement is incorrect because gross income is calculated prior to any deductions or expenses. It represents the total revenue earned, not what remains after costs have been accounted for. Therefore, gross income cannot be defined as being calculated after expenses.

B (Net income is income before expenses) YOUR ANSWER

This option is misleading as it reverses the definitions of net income. Net income is actually the earnings that remain after all expenses, taxes, and deductions have been subtracted from gross income. Thus, referring to net income as income before expenses is fundamentally incorrect.

C (Net income exceeds gross income) YOUR ANSWER

This statement is incorrect because net income cannot exceed gross income. By definition, net income is derived from gross income after all expenses have been deducted. Therefore, net income is always less than or equal to gross income, depending on the expenses incurred.

Conclusion

Understanding the distinction between gross and net income is essential for financial clarity. Gross income is the total earnings before any deductions, while net income reflects the actual amount received after expenses. The correct statement highlights that gross income is established before any expenses are deducted, emphasizing its role as the foundational measure of income.

Related Questions

View all