How are foreign exchange gains or losses treated in financial statements?

Foreign exchange gains or losses are reported in the income statement. This treatment reflects the impact of fluctuating currency rates on the financial performance of a business. When a company conducts transactions in foreign currencies, any changes in the exchange rates between the transaction date and the date of settlement can result in a gain or loss. By recognizing these fluctuations in the income statement, it provides a clear view of how such transactions have impacted the company's overall profitability during the reporting period.

This reporting method aligns with standard accounting practices, which dictate that items affecting earnings, such as foreign exchange fluctuations, should be reflected in the income statement to give stakeholders a complete picture of financial outcomes. Gains increase net income while losses reduce it, thus affecting the overall financial results presented to investors and analysts.

The other options do not accurately represent the treatment of foreign exchange gains or losses. For example, directly deducting from revenues or recording in retained earnings would not give a clear picture of performance in the current period, and ignoring these gains or losses in cash flow statements would overlook the real economic impact of currency movements on cash flows from operations.