CPIM Practice Exam

What is the primary purpose of an income statement?

1. To show the company’s financial position at a specific point in time

2. To report the cash flows from operating activities

3. To show profitability over a given period

4. To detail the owners' equity changes

The correct answer is: To show profitability over a given period

The primary purpose of an income statement is to show profitability over a given period. This financial statement summarizes the revenue generated and expenses incurred during a specific timeframe, typically a quarter or a year. By detailing how much money the company earned versus how much it spent, the income statement provides essential insights into the company's operational performance and its ability to generate profit. This profitability perspective is vital for stakeholders such as investors, management, and analysts, as it helps them assess the company’s performance and future potential. It goes beyond just presenting figures; it also helps in understanding the efficiency of a business's operations, including how effectively it generates income relative to its expenses. In contrast, other financial statements serve different purposes, such as the balance sheet, which focuses on financial position at a specific point in time, and the cash flow statement, which emphasizes cash movements from various activities.