|
Correct Answer: it is a summary of cash receipts and cash disbursements.
the income statement, one of the core financial statements of a firm, does not serve as a summary of cash receipts and cash disbursements. this misconception is common but incorrect. the document that actually records cash inflows and outflows is the cash flow statement, not the income statement. the cash flow statement captures all cash activities related to operating, investing, and financing functions of a business.
the primary purpose of the income statement is to provide information about a company's revenues and expenses over a specific period, usually a fiscal quarter or year. this statement details how the revenues are transformed into the net income or net profit, which is achieved by subtracting all expenses from all revenues. this includes costs such as cost of goods sold, operating expenses, interest on debt, taxes, and other operational expenditures.
the income statement is crucial for stakeholders, including investors and creditors, as it provides a clear picture of the company’s profitability and operational success. by examining an income statement, stakeholders can assess how effectively a company generates profit from its operations. it also allows investors to predict future performance and determine the viability of investing in the company.
in contrast, an income statement does not focus on cash alone. while some transactions reflected in the income statement may affect cash, not all do so directly. for example, depreciation expense, a common line item on income statements, reduces profit but does not involve any actual cash transaction. similarly, sales made on credit are recorded as revenue but do not immediately affect cash until the payment is received.
in summary, the correct statement about the income statement is that it is a summary of revenues and expenses which indicates the company’s profitability over a certain period. it is not a summary of cash receipts and cash disbursements, as that is the specific purpose of the cash flow statement. understanding the distinct roles these financial statements play is crucial for accurate financial analysis and reporting.
|
ExamEdge's online practice test is that they mimicked the actual exam. I walked into the exam feeling confident I knew the material and walked out knowing my time studying with Exam Edge was well worth the effort."
Back To General Exam Info