Which is the true statement?
a. In a CVP income statement, costs and expenses are classified only by function.
b. The CVP income statement is prepared for both internal and external use.
c. The CVP income statement shows contribution margin instead of gross profit.
d. In a traditional income statement, costs and expenses are classified as either variable or fixed.
The correct answer and explanation is :
The correct statement is:
c. The CVP income statement shows contribution margin instead of gross profit.
Explanation:
A Cost-Volume-Profit (CVP) income statement is specifically designed to help managers understand the relationship between costs, sales, and profits, and how these elements affect a company’s financial performance. Here’s an analysis of each statement:
- Statement a: “In a CVP income statement, costs and expenses are classified only by function.”
- This statement is incorrect. In a CVP income statement, costs are classified by behavior (fixed vs. variable costs), not by function. Functional classification is a feature of a traditional income statement, where costs are grouped according to their role in operations (e.g., cost of goods sold, selling expenses, administrative expenses).
- Statement b: “The CVP income statement is prepared for both internal and external use.”
- This statement is incorrect. The CVP income statement is primarily used for internal purposes, particularly for decision-making, cost analysis, and forecasting. External financial statements (like the traditional income statement) are prepared for external stakeholders, such as investors and regulators, and follow generally accepted accounting principles (GAAP).
- Statement c: “The CVP income statement shows contribution margin instead of gross profit.”
- This statement is correct. In a CVP income statement, the focus is on contribution margin rather than gross profit. The contribution margin represents sales revenue minus variable costs (variable cost of goods sold and variable operating expenses), which is crucial for determining the profitability of a company at various levels of sales. Gross profit, on the other hand, is calculated as sales revenue minus only the cost of goods sold (COGS), not taking variable operating expenses into account.
- Statement d: “In a traditional income statement, costs and expenses are classified as either variable or fixed.”
- This statement is incorrect. A traditional income statement classifies costs by their function (e.g., cost of goods sold, selling expenses, administrative expenses), not by their nature (variable vs. fixed). It does not separate costs into fixed or variable categories. Variable and fixed costs are analyzed in a CVP income statement for decision-making purposes, but not in traditional statements.
Thus, the correct answer is c, as the CVP income statement emphasizes the contribution margin (sales minus variable costs), which is a key element for making business decisions based on cost-volume-profit analysis.