In financial accounting, what is the primary purpose of an income statement?

• A. To show the cash received and cash paid during a period, classified into operating, investing, and financing activities
• B. To report a company’s revenues, expenses, and resulting net income or net loss for a period of time
• C. To report changes in shareholders’ equity during a period, including stock issuances and dividends
• D. To report a company’s assets, liabilities, and shareholders’ equity at a specific point in time

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the purpose of the income statement in financial accounting. The income statement is designed to summarize a company's financial performance over a specific period of time.
2. Step 2: Recognize that the income statement reports revenues earned and expenses incurred during the period, which helps determine the net income or net loss.
3. Step 3: Differentiate the income statement from other financial statements: the cash flow statement shows cash inflows and outflows, the statement of changes in equity reports changes in shareholders' equity, and the balance sheet reports assets, liabilities, and equity at a point in time.
4. Step 4: Note that the income statement's key components include total revenues, total expenses, and the resulting net income or net loss, which reflects the company's profitability.
5. Step 5: Conclude that the primary purpose of the income statement is to provide users with information about the company's financial performance by reporting revenues, expenses, and net income or loss for a period.