Which of the following best describes what an income statement reports?

• A. Cash receipts and cash payments from operating, investing, and financing activities over a period of time
• B. Assets, liabilities, and shareholders’ equity at a specific point in time
• C. Revenues earned and expenses incurred over a period of time, resulting in net income or net loss
• D. Changes in shareholders’ equity over a period of time, including owner investments and dividends

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the purpose of an income statement. It is a financial report that summarizes a company's financial performance over a specific period of time.
2. Step 2: Identify the key components of an income statement, which are revenues earned and expenses incurred during the period.
3. Step 3: Recognize that the income statement calculates net income or net loss by subtracting total expenses from total revenues.
4. Step 4: Differentiate the income statement from other financial statements: the balance sheet reports assets, liabilities, and equity at a point in time; the statement of cash flows reports cash inflows and outflows; and the statement of changes in equity reports changes in shareholders’ equity.
5. Step 5: Conclude that the income statement best describes the financial results of operations by reporting revenues and expenses over a period, leading to net income or net loss.