Which equation represents the Income Statement?

• A. Revenues - Expenses = Net Income
• B. Assets = Liabilities + Equity
• C. Cash Inflow - Cash Outflow = Cash Balance
• D. Gross Margin = Revenue - COGS

Answer: (A)

Profitability over a period is shown on the Income Statement by subtracting expenses from revenues to get net income. This is why the correct equation is revenues minus expenses equals net income, because it captures the bottom line after all operating activities are accounted for. If you subtract only the cost of goods sold from revenue you obtain gross profit, which is a part of the income statement but not the final net income. The balance sheet uses assets equal liabilities plus equity, which is a different financial statement. The idea of cash inflows minus cash outflows equalling ending cash describes the cash flow concept, not the overall income statement. And gross margin, defined as revenue minus COGS, is a component metric, not the full income statement equation.