Income Statement Exclusions

Steps:

• Recall income statement shows revenues, expenses, gains, and losses to compute net income.
• Item 1 (cost of goods sold) is a core operating expense, so it appears.
• Item 2 (depreciation) is a non-cash expense reducing net income, so it appears.
• Item 3 (dividends declared) is a distribution of retained earnings, not an expense.

Why D is correct:

• Under GAAP, dividends reduce retained earnings directly and do not affect net income, so they appear only in the statement of retained earnings or equity.

Why the others are wrong:

• A is wrong: Item 1 is an expense reported in income statement.
• B is wrong: Items 1 and 2 are both expenses included in income statement.
• C is wrong: Item 2 is an expense reported in income statement.

Final answer: D