Certified Financial Management Specialist Practice Exam

What is the primary purpose of an income statement?

1. To summarize assets and liabilities

2. To show cash inflows and outflows

3. To summarize revenues and expenses over a specific period

4. To analyze financial ratios

The correct answer is: To summarize revenues and expenses over a specific period

The income statement specifically serves to summarize revenues and expenses over a specific period, providing a clear picture of a company's profitability during that timeframe. It calculates net income by subtracting total expenses from total revenues, allowing stakeholders to assess how well the company has performed financially. This statement is essential for investors, management, and analysts as it reveals operational efficiency and helps in making informed decisions regarding the business. While other financial statements, such as the balance sheet, gather data on assets and liabilities, and the cash flow statement tracks cash inflows and outflows, the income statement focuses solely on the performance aspect over an accounting period. Analyzing financial ratios is relevant for understanding financial health, but it doesn't define the primary function of an income statement, which is centered on revenue and expense summary. Therefore, the chosen answer accurately reflects the fundamental role of an income statement in financial reporting.