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Series 79: Collection, Analysis & Evaluation of Data
Series 79 practice questioneasyStatement Linkages

Which of the following statements is correct regarding the relationship between the income statement and the balance sheet?

  1. AOperating expenses from the income statement are subtracted from total equity.
  2. BNet income from the income statement is added to shareholders’ equity on the balance sheet.✓ Correct answer
  3. CRevenue from the income statement is shown as a liability.
  4. DDepreciation expense increases assets on the balance sheet.
Explanation

Why BNet income from the income statement is added to shareholders’ equity on the balance sheet.

Net income flows into retained earnings, part of shareholders’ equity on the balance sheet. Operating expenses do not reduce equity directly, revenue is not a liability, and depreciation reduces assets, not increases them.

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