Texas Real Estate Brokerage Sales Apprentice Education (SAE) Practice Exam

Which financial statement provides insights into a company's profitability?

1. Balance sheet

2. Income statement

3. Cash flow statement

4. Equity statement

The correct answer is: Income statement

The income statement is the financial statement that provides insights into a company's profitability. It summarizes the revenues generated and the expenses incurred over a specific period, allowing stakeholders to assess the company's performance during that timeframe. The main components of the income statement include total revenue, cost of goods sold, and operating expenses, culminating in the net income or loss. By analyzing these figures, investors and management can determine how effectively the company is generating profit relative to its sales and operational costs. In contrast, the balance sheet focuses on the company's assets, liabilities, and equity at a specific point in time, giving a snapshot of its financial position rather than its profitability over a period. The cash flow statement provides information about the company's cash inflows and outflows, detailing how cash is generated and used, but it does not directly measure profitability. The equity statement details changes in shareholders' equity, illustrating any transactions affecting the equity capital but again does not directly address profitability.