Verify Net Income on an Income Statement

How is net income on an income statement verified?

a) By checking the cash flow statement
b) By checking the retained earnings statement
c) By checking the balance sheet
d) By checking the trial balance
Final answer:Net income on an income statement is verified by checking the retained earnings statement.

Answer:

The net income on an income statement is verified by checking the retained earnings statement. This statement shows the changes in the retained earnings account over a specific period, which includes the net income earned by the company.

Net income on an income statement is a critical figure that indicates the profitability of a company during a specific period. It represents the total revenue earned minus the total expenses incurred, resulting in the net profit or loss.

To verify the accuracy of the net income, one must look at the retained earnings statement. Retained earnings are the amount of net income that a company retains and reinvests in the business rather than distributing it to shareholders as dividends.

Comparing the change in retained earnings from one accounting period to another with the net income reported on the income statement helps confirm that the net income figure is correct. If the change in retained earnings aligns with the net income, it provides assurance that the net income reported is accurate.

Other financial statements like the cash flow statement, balance sheet, and trial balance do not directly verify the net income. The cash flow statement shows the cash inflows and outflows, the balance sheet provides a snapshot of the company's financial position, and the trial balance ensures the equality of debits and credits in the accounting records.

Therefore, to ensure the reliability of net income reported on an income statement, checking the retained earnings statement is the most appropriate method of verification.