Given Simon Company's year-end balance sheets, which of the following financial statements would most directly show the company's profitability for the year?

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

Answer: (B)

Verified step by step guidance

1. Understand the purpose of each financial statement: The Income Statement shows a company's profitability by detailing revenues, expenses, and net income for a specific period. The Balance Sheet provides a snapshot of the company's financial position at a specific point in time, including assets, liabilities, and equity. The Statement of Retained Earnings explains changes in retained earnings, and the Statement of Cash Flows shows cash inflows and outflows during a period.
2. Identify the key term 'profitability' in the question. Profitability refers to the ability of a company to generate earnings compared to its expenses and other costs during a specific period.
3. Recognize that the Income Statement is the financial statement most directly related to profitability. It includes key components such as revenues, expenses, and net income, which are used to calculate profitability metrics like gross profit, operating profit, and net profit.
4. Eliminate other options based on their primary focus: The Balance Sheet does not show profitability but rather the financial position. The Statement of Retained Earnings shows changes in retained earnings, which are influenced by net income but do not directly display profitability. The Statement of Cash Flows focuses on cash movements, not profitability.
5. Conclude that the Income Statement is the correct answer because it directly shows the company's profitability for the year by summarizing revenues and expenses to calculate net income.