Which financial statement shows how well a company performed over the past year?

• A. Statement of Retained Earnings
• B. Income Statement
• C. Statement of Cash Flows
• D. Balance Sheet

Answer: (B)

Verified step by step guidance

1. Understand the purpose of each financial statement: The Income Statement shows a company's performance over a specific period, including revenues, expenses, and net income. The Statement of Retained Earnings explains changes in retained earnings. The Statement of Cash Flows details cash inflows and outflows. The Balance Sheet provides a snapshot of assets, liabilities, and equity at a specific point in time.
2. Identify the key requirement of the question: The problem asks which financial statement reflects the company's performance over the past year. Performance is typically measured by revenues, expenses, and net income.
3. Relate the concept of performance to the financial statements: The Income Statement is specifically designed to show how well a company performed by summarizing its revenues and expenses, resulting in net income or loss for the period.
4. Eliminate incorrect options: The Statement of Retained Earnings focuses on changes in retained earnings, not overall performance. The Statement of Cash Flows focuses on cash activities, not profitability. The Balance Sheet provides a snapshot of financial position, not performance.
5. Conclude that the correct financial statement to assess performance over the past year is the Income Statement, as it directly reports revenues, expenses, and net income.