How do you calculate earnings before interest and taxes (EBIT)?

• A. Revenue minus operating expenses (excluding interest and taxes)
• B. Net income
• C. Gross profit minus taxes
• D. Revenue minus cost of goods sold

Answer: (A)

EBIT shows how much money a company earns from its core operations before any financing costs or taxes are taken out. To get it, start with revenue and subtract all operating costs that are needed to run the business, but you do not subtract interest or taxes. That’s why revenue minus operating expenses (excluding interest and taxes) is the correct way to calculate EBIT. Net income already includes interest and taxes, so it’s after those costs. Gross profit is revenue minus the cost of goods sold only, which leaves out other operating expenses like SG&A and depreciation. So it isn’t EBIT.