Net income can be misleading because it does not take into account which of the following?

• A. Debts
• B. Revenues
• C. Fixed assets
• D. Cash on hand

Answer: (A)

Net income shows profitability after expenses, but it doesn’t reveal how much cash the company has or what it owes. The amount of debt a company carries affects cash needs and risk, and those debt-related cash outflows (like principal repayments) aren’t captured in net income. So net income can look healthy even when the business faces significant debt and cash obligations, making it a potentially misleading measure of overall financial health. Revenues are part of how net income is calculated, and while fixed assets relate to long-term investments (with depreciation affecting net income), their mere presence isn’t what makes net income misleading. Cash on hand concerns liquidity, which is separate from profitability, though still important.