CSLB Contractor's Law & Business Practice Exam

What does an income statement primarily show?

1. Assets and liabilities

2. Revenues and expenses over time

3. Cash flow

4. Balance sheet totals

The correct answer is: Revenues and expenses over time

An income statement is a key financial document that focuses on a company's operational performance over a specific period, typically showing the revenues generated and the expenses incurred during that time. It provides valuable insights into how much income a business earns from its regular operations (sales, services, etc.) minus the costs associated with producing that income (like operating expenses, taxes, and interest). This statement is crucial for evaluating the profitability of a company and determining its financial health over the reporting period. In contrast, other financial statements serve different purposes. An income statement does not provide information on assets and liabilities; that information is found on the balance sheet. Similarly, while cash flow is important for understanding liquidity and cash management, it is reported specifically in the cash flow statement, not the income statement. The balance sheet totals reflect a company’s financial position at a specific point in time, which is unrelated to the performance metrics captured in the income statement. Thus, the income statement's primary function is to highlight revenues and expenses, making this choice the correct one.