Income Statement

Lesson

The income statement summarizes a company's revenues, expenses, and profits/losses over a specific period of time. It is an essential tool for investors and analysts to evaluate a company's financial performance and profitability.

Practice Question #1

Which of the following items is NOT found on an income statement?

A) Revenue

B) Gross Profit

C) Retained Earnings

D) Operating Income

Select an option above to see an explanation here.

A) Revenue is the total money a company earns from business activities. B) Gross Profit is the difference between revenue and the cost of goods sold (COGS). C) Retained Earnings are a balance sheet component, not the income statement. D) Operating Income is a company's profit from its core business operations.

Terms

Revenue:: The total amount a company earns from its business activities during a specific period.
Expenses:: The costs incurred by a company to generate revenue, such as salaries, rent, and utilities.
Gross Profit:: The difference between revenue and the cost of goods sold (COGS).
Operating Income:: A company's profit from its core business operations, excluding non-operating income and expenses.
Net Income:: The final profit or loss a company reports after accounting for all revenues, expenses, gains, and losses.
Earnings Per Share (EPS):: The portion of a company's net income allocated to each outstanding share of common stock.
Operating Margin:: The percentage of revenue a company retains as operating income.
Gross Margin:: The percentage of revenue a company retains as gross profit.

Practice Question #2

What is the primary purpose of an income statement?

A) To provide a snapshot of a company's assets, liabilities, and equity

B) To show how a company generates and uses cash

C) To summarize a company's revenues, expenses, and profits/losses over a specific period

D) To calculate a company's total change in equity

Select an option above to see an explanation here.

A) This is the primary purpose of a balance sheet. B) This is the primary purpose of a cash flow statement. C) The income statement summarizes a company's financial performance over a specific period. D) This is the primary purpose of comprehensive income.

Do Not Confuse With

Balance Sheet:: A financial statement that provides a snapshot of a company's assets, liabilities, and equity at a specific time.
Cash Flow Statement:: A financial statement that shows how a company generates and uses cash during a specific period.
Retained Earnings:: The portion of a company's net income that is retained and not distributed to shareholders as dividends.

Practice Question #3

What is the primary purpose of an income statement?

A) To report a company's financial position at a specific point in time

B) To report a company's cash inflows and outflows over a period of time

C) To report a company's revenues and expenses over a period of time

D) To report a company's changes in equity over a period of time

Select an option above to see an explanation here.

A) This describes the purpose of a balance sheet, not an income statement. B) This describes the purpose of a cash flow statement, not an income statement. C) An income statement reports a company's revenues and expenses over a period of time, showing its profitability during that period. D) This describes the purpose of a statement of changes in equity, not an income statement.

Historical Example

In the early 2000s, a major telecommunications company reported impressive revenue growth and net income on its income statements. However, further investigation revealed that the company had been inflating its revenues by engaging in fraudulent accounting practices. This ultimately led to the company's bankruptcy and a significant loss for its investors.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

A popular coffee shop chain reports its quarterly income statement, showing an increase in revenue due to the opening of new stores and higher sales. However, the company's net income has decreased due to higher expenses related to store expansion and increased marketing costs.