Chartered Financial Analyst (CFA) Practice Exam Level 2

Which financial statement summarizes a company's operations, expenses, and profits or losses?

1. Balance Sheet

2. Cash Flow Statement

3. Income Statement

4. Statement of Changes in Equity

The correct answer is: Income Statement

The income statement is the financial statement that summarizes a company's operations, expenses, and profits or losses over a specific period. It provides a detailed account of how much revenue the company generated from its core activities, outlines the costs incurred in earning that revenue, and ultimately indicates whether the company was profitable or incurred a loss during the reporting period. This statement typically includes various components such as sales revenue, cost of goods sold (COGS), operating expenses, interest, taxes, and net income. By analyzing the income statement, investors and analysts can assess the company’s operational efficiency, profitability trends, and ability to generate earnings relative to its expenses. In contrast, the balance sheet provides a snapshot of the company’s assets, liabilities, and shareholders' equity at a specific point in time, while the cash flow statement outlines the cash inflows and outflows from operating, investing, and financing activities. The statement of changes in equity reflects changes in equity accounts over time, such as retained earnings and dividends paid. Each of these other statements serves a different purpose and does not summarize operations, expenses, and profits or losses in the same way the income statement does.