society week 4 dq

Finance

Student’s name

University affiliation

Finance

What is income statement? Why do we need I/S? Compared with balance sheet, does Income Statement enhance the information of financial reporting, why or why not?

An income statement refers to a financial statement that reports on the financial performance of a company over a certain specific period. The financial performance of the company is usually assessed through giving a summary of the revenues incurred by the business and the expenses in both the operating and the non-operating activities. The income statement is needed in business so that it can show the net profit or the net loss that a company has incurred in a certain and a specific accounting period. The income statement is also referred to as the profit and loss statement or the statement of the expenses and revenues of an organization (Hancock, Bazley, & Robinson, 2015).

A balance sheet, on the other hand, refers to a financial statement that gives a summary of the assets, liabilities and the shareholder’s equity in a company at a certain specified point in time. The balance sheet thus shows the investors what the company owns and owes and also the amount that the shareholders have invested. The balance sheet of a company should always adhere to the formula whereby assets are supposed to be equal to the liabilities and the shareholder’s equity. These two parts must balance out, and this means that a business or a company must pay for all its assets through either borrowing money in the form of liabilities or take money from the investors through the issuing of the shareholders’ equity.

As compared to the balance sheet, it is clear that the income statement enhances the information of financial reporting. One of the reasons behind this is since the income statement offers the performance information on a certain period. In this, it begins with the sales obtained and works done to the net income obtained by the company and the earnings received per share.

In contrast and comparison with statement of cash flows, what are the advantages and disadvantages of I/S?

The statements of cash flows are considered to be very imperative in the field of financial accounting in that the investors usually rely on it so that they can gauge the financial strength of a company. When a company has a strong cash flow, it can expand its business, invest in new projects and also make payments in the form of dividends to the respective shareholders. One of the differences between the statement of cash flows and the income statement is that while the income statement reveals the net profit and loss of the business in a specified accounting period, the statement of cash flows is a financial statement which reflects on the inflows and the outflows of cash in a particular accounting period. The other difference between the two is that the income statement is accrual based while the cash flow statement is cash based. The other difference is that the objective of the income statement is to know how profitable a company is and also the owner’s equity while the objective of the cash flow statement is to ascertain the liquidity as well as the solvency of the business. Lastly, while the income statement takes into account the depreciation, the statement of cash flows do not take into account the rate of depreciation (Weygandt, Kieso, & Kimmel, 2010).

One of the advantages of the income statement is that it shows the profitability of the business in a certain period which is important in making financial decisions. The second advantage of the income statement is that it reveals all the expenses that are incurred in a company so that it can earn revenues. To add on to this, the income statement also assists businesses in the analyzing of the expenses and hence takes into consideration the major streams of the operating revenues. One of the disadvantages of the income statement is that it is based on accrual accounting which makes it look fictional because it does not give the cash transactions. Cash is considered as key to every organization, and it is not possible to calculate the free cash in the organization through the use of the income statement.

References

Hancock, P., Bazley, M. & Robinson, P. (2015). Contemporary accounting : a strategic approach for users. South Melbourne, Victoria: Cengage Learning Australia.

Weygandt, J., Kieso, D. & Kimmel, P. (2010). Financial accounting. Hoboken, NJ: Wiley.