The Correct Definition Of An Income Statement Includes Which Of The Following?

The correct choice of this multiple choice question is (B), as Income Statement or Statement of Comprehensive Income shows the matching of revenues with relevant expenses related to the current accounting period in order to calculate net profit or net loss for the period and also to check the financial performance of the business during the accounting period. Financial performance shows how much effectively, the company utilizes its resources, minimize and control unnecessary expenses to generate revenues over the period. If the company is performing well financially, then it can stabilize, grow and expand the business and can survive in the market.

The option A is incorrect, as changes in equity over a period of time is shown by Statement of Owners’ Equity or Statement of Retained Earnings. It also shows the profits retained by the company in the business after paying Dividends to shareholders. Company’s business needs retained earnings to grow and expand the business. After the preparation of this statement, the company prepares Balance Sheet.

The option C is also a wrong choice here as this statement is related to Statement of Cash Flows which shows cash inflows and cash outflows from operating, investing and financing activities during the accounting period. Cash inflows mean cash coming into the company’s business (a such as due to cash sales, received cash from customers, etc.) while cash outflows indicate that the cash is going out of the company’s business (such as cash paid to suppliers, expenses paid, paying debts, etc.).

The option D is related to Balance Sheet or Statement of Financial Position, so it is also a wrong choice here. A balance sheet represents Accounting Equation which shows the relationship between assets, liabilities and equity. It says that assets are always equal to liabilities plus equity at a point in time which means that in any time or position, there is always equality or balance between total assets and total liabilities & equity.