Why is an income statement important?

Companies have to produce certain documents which are known as financial statements periodically. The financial performance of the company can be monitored with the help of financial statements. The financial statements are useful for both internal as well as external purposes. If the financial statements are prepared for internal purposes, the management and the employees will use them to verify certain important financial matters. The management’s plans as well as their future goals are finalized using financial statements. The three kinds of financial statements show cash flow, a statement of income, and a balance sheet. The investors using money for purchasing the stock have to be familiar with the financial statements.

The income statement will create a summary of the revenues for the company and the expenses for every year or every quarter. Two formats are available in the financial reports for generating the income statement. They are multi-step and single-step formats. The income statement is prepared directly when the finance-related books are closed every month. The income statement gives the detailed information on the exact view of the expenditures and revenues of the business for a period of time like one month, quarter year, or one year.

The profitability and performance of the company is estimated with the help of the income statement by the company’s management as well as internally and externally by the creditors and investors. The statement aids in the risk assessment for the investors and the creditors. The income statement is classified into three divisions: total expenses, total revenue, and net income. The revenue created at a particular period of time through the usual business operations is included in the total revenue. The total expenses in the statement include: utilities, insurance, rents, salaries, wages, and supplies. The difference between the total revenues and the total expenditures will result in the net income, which is included in the financial statement of the company. The income statement gives the overall financial picture of the company and is very important.

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