Financial Accounting and Reporting CPA Practice Exam 2025 – Complete Prep Resource

The initial cost of an option is indeed factored into the calculation of profits, specifically in how it influences gross profit when determining net profit. When a company acquires an option, this cost is typically considered a kind of expense related to obtaining a financial benefit, such as future contractual rights.

In the accounting framework, expenses directly reduce gross profit, which in turn impacts the net profit calculation. Gross profit is the revenue remaining after deducting the cost of goods sold but does not yet account for other expenses. By including the cost of the option as an expense, it lowers the figure for gross profit and hence affects the net profit.

This treatment aligns with the matching principle in accounting, where expenses should be recognized in the same period as the revenues they help generate. In this case, ignoring the cost would lead to an overstated net profit, contradicting the accurate financial representation of the company's performance.

Thus, considering how expenses reduce profits, the correct option reflects the impact of the option's initial cost on the overall profit structure of the company.