Which financial statement reports revenues and expenses?
A Statement of retained earnings
B Income statement
C Balance sheet
D Statement of cash flows
The correct answer and explanation is:
The correct answer is B) Income statement.
The income statement is the financial document that reports a company’s revenues and expenses over a specific period, typically a quarter or year. The primary purpose of this statement is to provide a clear picture of a company’s profitability during that time frame. It starts with the company’s total revenues or sales and deducts the expenses incurred to generate those revenues, resulting in either a net profit or a net loss.
The income statement can be broken down into several key sections:
- Revenues: This section shows the total amount of money earned from the sale of goods or services before any expenses are deducted.
- Cost of Goods Sold (COGS): This is the direct cost associated with producing the goods or services sold by the company.
- Gross Profit: This is the difference between revenues and COGS. It represents the basic profitability of the core business operations.
- Operating Expenses: These include the expenses related to the normal functioning of the business, such as salaries, rent, and utilities.
- Operating Income: This is calculated by subtracting operating expenses from the gross profit.
- Non-operating Income and Expenses: This section includes items like interest income, interest expense, or gains and losses from investments.
- Net Income or Net Loss: This is the bottom line of the income statement, showing the overall profitability of the company after all revenues and expenses have been accounted for.
In comparison, the other financial statements serve different purposes:
- A) Statement of retained earnings reports the changes in the company’s retained earnings over a period.
- C) Balance sheet shows the company’s assets, liabilities, and shareholders’ equity at a specific point in time.
- D) Statement of cash flows details the cash inflows and outflows over a period, showing the company’s liquidity position.
Thus, the income statement is the key document for understanding a company’s financial performance.