Income Statement

FAR tests this less as a definition than as a classification and presentation drill. The “tell” is an item dropped at the bottom of a fact pattern—a plant disposal, a litigation settlement, a tax-rate change—and you must decide where it lands. The high-yield rule: discontinued operations get their own line, net of tax, presented after income from continuing operations (it’s itself a component of net income). “Extraordinary items” were eliminated by ASU 2015-01, so any choice using that label is a distractor. Know single-step (all revenues/gains grouped, all expenses/losses grouped, netted once) versus multi-step (gross profit, then operating income, then non-operating), and that income statement accounts are nominal/temporary—they close to retained earnings each period.

The classic trap is mixing statements. Unlike the balance sheet, whose permanent accounts carry forward, the income statement resets to zero; net income bridges into retained earnings. Don’t confuse net income with cash—the statement of cash flows reconciles accrual results to cash, because the income statement runs on accrual accounting. Hook: temporary accounts get a fresh start.