Why Do We Need the Income Statement?

Why Do We Need the Income Statement?

The income statement is a statement that shows all revenue that a company has earned as well as the expenses it has incurred in an accounting period. This is to measure the company’s business activities and to determine its profit or loss throughout that period. The income statement is one of the financial statements (Also see Which is the Most Important Financial Statement?) that the accountants from an accounting firm in Singapore would generate if business owners outsource their accounting tasks to them. This is a statement that forms a crucial part of a company’s books of accounts.

An income statement summarises the performance of the company in an accounting period. All stakeholders get to know the business activities that it has carried out in that period by reading this statement. Besides, it compares the performance of the business in the current year with its past year performance. The income statement (Also see Accounting – 4 Tips for Analyzing an Income Statement) also shows a comparison between the performance of a company with its peers. This enables the analysts to compare the growth in revenue and expenses (Also see An Overview of Deferred Expenses) between different companies quickly.

The company’s management is probably the party that needs the income statement the most. This statement can provide them with a clear picture of the company’s performance in a given accounting period. It serves as a crucial indicator in telling the company’s management whether the strategies that they have planned at the beginning of the accounting period have worked and paid off. If yes, they will be able to know the scope of improvement from the income statement too.

If the company is a public company, it needs to prepare and publish its annual report before it closes its books. From the investors’ perspective, the income statement is a good source of information that they can use to do basic evaluations of the company. After they analyse the income statement, they will be able to decide whether they want to invest in that company.

Besides, companies need to submit their income statement to the banks or financial institutions every quarter or every year. This is for them to review how the company uses its earnings. After assessing the company’s income statement, the banks will decide whether they want to extend the limits that the company enjoys or whether they should adjust any sanction terms based on the company’s performance.

The company’s creditors, especially the short-term creditors like the suppliers, should also assess the numbers that the company has reported in its income statement. This statement can show the company’s creditworthiness as well as its ability to settle its financial obligations. This is a statement that serves as an indicator for the creditors to decide whether they should maintain the same credit terms for the company.

In a nutshell, the income statement is an essential financial statement (Also see Who Needs the Financial Statements?) that serves various purposes. It can provide vital information to the parties that need it, which includes the company’s management, stakeholders, financial institutions as well as the creditors. Hence, business owners should not underestimate the importance of generating their income statements accurately.

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