Question 11

A comparative income statement helps by showing trends in revenues and expenses over multiple periods.

A comparative income statement is beneficial in this scenario as it allows the business to analyze the trends in both revenues and expenses over the specified periods, providing insight into why net income has decreased despite increasing revenues.

A) It calculates net income without considering previous years.

This option is incorrect because a comparative income statement specifically includes data from previous years, allowing for a direct comparison. It does not simply calculate net income in isolation but presents a comprehensive view over multiple periods.

B) It shows trends in revenues and expenses over multiple periods.

This option is correct as it accurately describes the primary function of a comparative income statement. By highlighting the trends in revenues and expenses, the business can identify any discrepancies that may have led to a decrease in net income, despite higher revenue figures.

C) It displays revenue and expenses in a single total.

This option is incorrect because a comparative income statement does not consolidate revenue and expenses into a single total. Instead, it separates these components, allowing for a clearer analysis of their individual impacts on net income.

D) It removes the impact of cost of goods sold.

This option is incorrect as well. A comparative income statement does not exclude costs such as the cost of goods sold; rather, it presents all expenses, including these costs, to provide a complete picture of the company's financial performance.

Conclusion

The correct answer, B, is definitive because it emphasizes the importance of analyzing trends, which is crucial in understanding the relationship between revenue growth and net income decline. The other options fail to capture the essence of what a comparative income statement provides, making B the only valid choice for addressing the business's concern.