Which two items on an income statement result in decreased net income if they are increased? (Choose 2)

Rationale

Cost of Goods Sold and Interest Expense result in decreased net income if they are increased.

Increasing the Cost of Goods Sold (COGS) directly raises the expenses associated with producing goods, reducing gross profit and ultimately net income. Similarly, an increase in Interest Expense raises the costs of borrowing, which also detracts from net income.

A (Sales) YOUR ANSWER

Increasing sales typically leads to higher revenues, which would improve net income, assuming costs remain constant. Therefore, an increase in sales does not result in decreased net income, making this choice incorrect.

B (Cost of Goods Sold) CORRECT

An increase in COGS raises the total expenses incurred in producing goods sold, thereby reducing gross profit and net income. This relationship makes it a valid choice for the question, as higher production costs directly impact profitability.

C (Gains) YOUR ANSWER

Gains refer to profits realized from transactions, such as selling an asset for more than its book value. Increasing gains will enhance net income, not decrease it, rendering this option incorrect.

D (Gross Profit) YOUR ANSWER

Gross profit is the difference between sales revenue and COGS. An increase in gross profit would indicate increased profitability, hence it cannot lead to decreased net income, making this choice incorrect.

E (Interest Expense) CORRECT

Interest Expense represents the cost of borrowing. An increase in this expense reduces net income because it represents an additional financial burden on the company, making this a correct choice.

F (Administrative Expenses) YOUR ANSWER

While increasing Administrative Expenses would reduce net income, it is not one of the two specified choices in the question. Thus, it is not selected, even though it could impact income negatively.

G (Depreciation) YOUR ANSWER

Like Administrative Expenses, an increase in Depreciation would reduce net income due to higher expense recognition. However, it is not one of the two correct answers specified in the question.

Conclusion

To summarize, the two items from the income statement that lead to decreased net income when increased are Cost of Goods Sold and Interest Expense. These expenses directly subtract from gross profit and net income respectively, while other options either increase revenue or do not directly impact net income in the same manner. Understanding these dynamics is crucial for financial management and analysis.

Which two items on an income statement result in decreased net income if they are increased? (Choose 2)

Cost of Goods Sold and Interest Expense result in decreased net income if they are increased.

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