Florida General Contractor Practice Exam

What is the name of the financial statement that explains how earnings on the balance sheet were derived over a period?

1. Cash flow statement

2. Income statement

3. Statement of changes in equity

4. Balance sheet summary

The correct answer is: Income statement

The financial statement that explains how earnings on the balance sheet were derived over a period is known as the income statement. This statement provides a detailed account of a company's revenues, expenses, and profits or losses over a specific timeframe, typically a fiscal quarter or year. By illustrating how much money came in from operations and how much was spent, the income statement offers insights into the company's financial performance. The income statement plays a crucial role in connecting the company's operational activities to its overall financial position, which is later represented on the balance sheet. Unlike other financial statements, such as the cash flow statement, which focuses on cash inflows and outflows, or the statement of changes in equity, which details changes in the ownership interests, the income statement specifically focuses on operational performance, making it essential for understanding profitability and earnings over that period. This direct link between accrued earnings and their sources through revenues and expenses gives stakeholders a comprehensive view of how financial outcomes are achieved, showcasing the effectiveness of management decisions and the company's overall economic health.