Which items are used to compute Alliah's net income?

• A. Revenue and expenses
• B. Inventory and accounts payable
• C. Capital stock and retained earnings
• D. Building and cash

Answer: (A)

Net income for a period is the result of subtracting expenses from revenues. Revenues are the money earned from selling goods or providing services, while expenses are the costs incurred to generate those revenues. The difference between these two figures appears on the income statement as net income. Therefore, the items used to compute net income are revenue and expenses. Inventory and accounts payable are balance sheet items (assets and liabilities) and don’t directly determine net income. Capital stock and retained earnings are equity accounts, reflecting ownership and accumulated earnings, not the calculation of a single period’s net income. Building and cash are assets and also don’t determine net income directly.