Which of the following best describes what the income statement shows?

• A. The revenues earned and expenses incurred over a specific period, resulting in net income or loss.
• B. The financial position of a company at a specific point in time, including assets, liabilities, and equity.
• C. The changes in owners' equity during a period, including investments and distributions.
• D. The cash inflows and outflows from operating, investing, and financing activities during a period.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the purpose of an income statement. The income statement is a financial report that summarizes a company's revenues and expenses over a specific period, ultimately showing the net income or net loss for that period.
2. Step 2: Compare the descriptions provided in the options. The income statement focuses on revenues earned and expenses incurred, not the financial position (which is shown in the balance sheet), changes in owners' equity (which is shown in the statement of equity), or cash flows (which are shown in the cash flow statement).
3. Step 3: Identify the key elements of the income statement. These include revenues, expenses, and the resulting net income or loss. This aligns with the description in the first option provided.
4. Step 4: Eliminate incorrect options. The second option refers to the balance sheet, the third option refers to the statement of equity, and the fourth option refers to the cash flow statement. These are distinct financial statements with different purposes.
5. Step 5: Conclude that the correct description of the income statement is: 'The revenues earned and expenses incurred over a specific period, resulting in net income or loss.'