Question

Which of the following is NOT true about Income Statements?

Question 2 options:

	Revenue recognition and the Matching Principle require the recognition of revenue in the time period for which the product or service has been substantially performed.
	Operating expenses flow the income statement in the period they are incurred, while capital spending is recorded on the balance sheet then depreciated.
	Nonrecurring items can distort reported earnings in a given period.
	Analysts only need to track reported income and earnings to evaluate a company.

Answer 1

Option 1: True

The income statement shows company's earnings and expenses over a certain period of time. Revenue recognition principle states that revenue should be recognised as and when it incurs irrespective of when the cash is received and the matching principle is based on the accrual concept and revenue recognition concept, and that is why revenue showed in the income statement is the recorded revenue over a period of time irrespective of actual cash being received.

Option 2: True

All the money which is spent by the company is not reported immediately on the Income Statement, infact it is treated as Asset on Balance Sheet. Operating expense is the ongoing cost for properly running a business or a product. Most of the times it is the direct cost for making a product, while its counterpart Capital Expenditure is actually the cost of providing non-consumable fragments for the product. And that is the reason, Capital spending is first noted in the balance sheet as an asset and then for proper taxation and accounting purpose, it is depreciated over a period of few years assuming a certain life of the asset.

Option 3: True

Nonrecurring items like the sale of a business unit can provide non-operating income which will directly impact the profits of the company but in an uneven way as compared to earning pattern in the last few years. That will cause distortion in the earning pattern of the company

Option 4: False

Company evaluation is not just done on the basis of income and earnings. Evaluation is impacted by the expense schedule as well. Company's ability to improve the work efficiency and cost-cutting is derived from the company's expense patterns. And that is one of the major reason to include not just income and earnings but elements like expenses also to evaluate the company.