Which two types of expenses are typically recorded on the income statement?

• A. Depreciation Expense and Inventory Purchases
• B. Income Tax Expense and Retained Earnings
• C. Cost of Goods Sold and Operating Expenses
• D. Interest Expense and Dividends Paid

Answer: (C)

Verified step by step guidance

1. Understand the purpose of the income statement: It is a financial report that shows a company's revenues, expenses, and profits over a specific period. The goal is to identify expenses that directly impact the company's profitability.
2. Review the types of expenses listed in the problem: Depreciation Expense, Inventory Purchases, Income Tax Expense, Retained Earnings, Cost of Goods Sold, Operating Expenses, Interest Expense, and Dividends Paid.
3. Clarify the nature of each expense: Depreciation Expense is a non-cash expense related to the allocation of the cost of tangible assets over their useful lives. Inventory Purchases are not directly recorded on the income statement but are part of the calculation of Cost of Goods Sold. Income Tax Expense is a direct expense on the income statement, while Retained Earnings are part of the equity section of the balance sheet. Cost of Goods Sold represents the direct costs of producing goods sold by the company, and Operating Expenses include costs related to running the business. Interest Expense is a financing cost, and Dividends Paid are distributions to shareholders, not expenses.
4. Focus on the correct answer: Cost of Goods Sold and Operating Expenses are typically recorded on the income statement because they represent the direct and indirect costs associated with generating revenue during the period.
5. Conclude by emphasizing the distinction: Expenses like Depreciation Expense, Income Tax Expense, and Interest Expense may also appear on the income statement, but Dividends Paid and Retained Earnings are not considered expenses and are not recorded on the income statement.