Business Degree Certification Practice Test

What is the primary purpose of an income statement?

1. To project future sales

2. To assess company assets

3. To show revenue and expenses over a period

4. To evaluate cash flow

The correct answer is: To show revenue and expenses over a period

The primary purpose of an income statement is to show revenue and expenses over a specific period. This financial document provides a summary of a company's financial performance by detailing how much money was earned (revenue) and how much was spent (expenses). The resulting figure, known as net income or profit, indicates whether the company was profitable during that period. The income statement is essential for stakeholders—such as investors, creditors, and management—because it provides insights into the company's operational efficiency and profitability. By analyzing revenue and expenses, stakeholders can assess how well the company controls its costs and generates income from its operations. This understanding is vital for making informed decisions regarding investments, lending, or business strategies. In contrast, projecting future sales relates more to business forecasting than to the historical financial performance captured in the income statement. Assessing company assets is a function of the balance sheet, which provides a snapshot of what the company owns and owes at a specific time. Evaluating cash flow pertains to the cash flow statement, focusing on the inflows and outflows of cash, which is different from the income generated and expenses incurred as covered by the income statement.