Which description matches the 'by nature' format of the income statement?

Which description matches the 'by nature' format of the income statement?

• A. Groups costs by function
• B. Groups costs by type
• C. Excludes depreciation
• D. Is identical to the cash flow statement

Answer: (B)

The by nature format of the income statement categorises expenses by what they are—their type or nature—such as raw materials, wages, depreciation, and interest. This means you see costs grouped as materials, staff costs, depreciation, etc., regardless of where they occur in the business’s activities. That’s why the best description is grouping costs by type. The other descriptions don’t fit: grouping by function describes a different format that sorts costs by activity (production, selling, administration). Depreciation is typically shown as a separate line in by nature, not excluded. And the income statement is not identical to the cash flow statement, which shows actual cash movements and treats non-cash items like depreciation differently.

The by nature format of the income statement categorises expenses by what they are—their type or nature—such as raw materials, wages, depreciation, and interest. This means you see costs grouped as materials, staff costs, depreciation, etc., regardless of where they occur in the business’s activities. That’s why the best description is grouping costs by type.

The other descriptions don’t fit: grouping by function describes a different format that sorts costs by activity (production, selling, administration). Depreciation is typically shown as a separate line in by nature, not excluded. And the income statement is not identical to the cash flow statement, which shows actual cash movements and treats non-cash items like depreciation differently.