What does an income statement tell you?

• A. Revenue, expenses, and net income
• B. Cash flow
• C. Assets and liabilities
• D. Equity changes

Answer: (A)

The main idea being tested is profitability over a period. The income statement shows how much revenue the business earned and what costs it incurred to earn that revenue, with the difference—the net income or loss—representing how much profit the company generated in that period. It’s the primary report for assessing operating performance and profitability, usually under accrual accounting where revenues and expenses are matched to the period in which they’re earned or incurred, not necessarily when cash changes hands. This is why it tells you about earnings rather than cash on hand.

Cash flow, assets and liabilities, and changes in equity come from other financial statements: cash flow details actual cash movements; the balance sheet lists what the company owns and owes (assets and liabilities) and the residual interest (equity) at a point in time; changes in equity are tracked separately by the equity statement or within the balance sheet.