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Question 1

302275

A partial listing of a company’s accounts is presented below:
Revenues $325,000
Operating expenses 253,000
Unrealized holding loss on available-for-
sale debt securities, net of tax 7,500
Income tax expense 24,000
Based on this information, how much should be reported as net income?

$72,000

$40,500

$55,500

$48,000

Answer 1

The company should report $48,000 as net income:
Revenues $325,000
Less: Operating expenses (253,000)
Less: Income tax expense (24,000)
Net income $ 48,000
Net income or loss for an accounting period is determined by matching realized revenues with those expenses and expired costs necessary to generate the related revenue. Revenues are inflows of assets or settlements of liabilities, during a period, from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations. Expenses are outflows of assets or incurrences of liabilities, during a period, from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations, and include operating expenses and income tax expense.
Net income is $48,000 ($325,000 – $253,000 – $24,000).
Unrealized holding gains and losses on available-for-sale debt securities are not reported on the income statement. They are reported as Other Comprehensive Income and in Accumulated Other Comprehensive Income in Shareholders’ Equity.