How are items typically classified on the income statement?

• A. By listing items in order of liquidity
• B. By separating cash and non-cash transactions only
• C. By grouping all assets and liabilities together
• D. By distinguishing between revenues and expenses, and further separating operating and non-operating items

Answer: (D)

Verified step by step guidance

1. Understand the purpose of the income statement: It is a financial report that shows a company's financial performance over a specific period, primarily by detailing revenues and expenses.
2. Recognize the classification structure: Items on the income statement are typically classified into two main categories: revenues and expenses. This helps in understanding the sources of income and the costs incurred during the period.
3. Distinguish between operating and non-operating items: Operating items relate to the core business activities, such as sales revenue and operating expenses. Non-operating items include gains or losses from activities not central to the business, such as interest income or expense.
4. Learn the importance of separating these categories: This classification provides clarity on how much profit or loss is generated from regular business operations versus other activities, aiding stakeholders in evaluating the company's performance.
5. Avoid common misconceptions: Items are not classified by liquidity, cash versus non-cash transactions, or by grouping assets and liabilities together. The correct approach is to distinguish between revenues and expenses, and further separate operating and non-operating items.