CPIM Practice Exam

What is the equation used to calculate income on an income statement?

1. Income = Revenue - Expenses

2. Income = Gross Margin - Expenses

3. Income = Assets - Liabilities

4. Income = Revenue + COGS

The correct answer is: Income = Revenue - Expenses

The equation used to calculate income on an income statement is derived from the fundamental relationship between revenue and expenses. Income, often referred to as net income or net profit, represents the remaining amount after all expenses associated with generating that revenue have been deducted. Therefore, the equation that accurately reflects this relationship is income equals revenue minus expenses. Revenue represents the total amount of money generated from sales of goods or services. Expenses encompass all costs incurred in the process of running the business, such as operating costs, salaries, rent, and other overheads. Subtracting these expenses from revenue gives a clear picture of the profit earned during a given accounting period. Understanding this concept is crucial for analyzing a company's financial health and performance. Other options mentioned do not accurately represent the correct relationship for calculating income. For example, stating that income equals gross margin minus expenses would not account for all costs associated with the business and would present an incomplete view of profitability. Similarly, comparisons to assets and liabilities or adding cost of goods sold (COGS) to revenue do not align with the standard practices of income statement reporting.