31. Abusiness notices that its net income has decreased despite an increase in revenue over two consecutive years. Why does a comparative income statement help in this scenario?
Answer: D
The comparative income statement shows trends in revenues and expenses over multiple periods.
A comparative income statement provides valuable insights by highlighting trends in both revenues and expenses across different time periods, allowing the business to identify underlying issues affecting net income despite increased revenue.
A) It removes the impact of cost of goods sold.
This option is incorrect as a comparative income statement does not remove any specific costs, including the cost of goods sold. Instead, it presents all revenues and expenses, including cost of goods sold, allowing for a comprehensive view of financial performance over time.
B) It calculates net income without considering previous years.
This option is also incorrect. A comparative income statement specifically includes data from previous years, which is essential for analyzing changes in net income over time. It does not disregard past performance but rather compares it to current results.
C) It displays revenue and expenses in a single total.
This statement is misleading because a comparative income statement does not condense revenue and expenses into a single total. Instead, it separately lists revenues and expenses for each period, enabling detailed analysis of performance and trends.
D) It shows trends in revenues and expenses over multiple periods.
This option is correct as it encapsulates the primary function of a comparative income statement. By displaying revenues and expenses over several periods, it allows businesses to analyze fluctuations, identify trends, and make informed decisions regarding financial management.
Conclusion
The correct answer, D, is definitively right because it emphasizes the main advantage of a comparative income statement: the ability to track and analyze trends in revenues and expenses over time. The other options fail to accurately describe the functionality of this financial statement, as they either misrepresent its purpose or omit critical aspects of its analysis capabilities.