North Carolina Building Contractor License Practice Exam

What financial document shows a company’s profitability over a specific period?

1. Balance sheet

2. Statement of cash flows

3. Budget report

4. Profit and loss statement

The correct answer is: Profit and loss statement

The profit and loss statement, also known as an income statement, is the financial document that specifically shows a company’s profitability over a defined period, typically a quarter or a year. It details the revenues generated from sales and subtracts the costs and expenses incurred to arrive at the net income or loss for that period. This statement allows stakeholders to assess how well the company is performing financially, making it an essential tool for decision-making regarding investments, operational efficiency, and financial forecasting. In contrast, the balance sheet provides a snapshot of a company's financial position at a specific point in time, detailing assets, liabilities, and equity but does not indicate profitability over time. The statement of cash flows focuses on the inflow and outflow of cash, giving insight into liquidity rather than profitability. A budget report outlines expected revenues and expenditures for future periods but does not reflect actual performance, making the profit and loss statement the most relevant document for understanding profitability during a specific timeframe.