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Importance of income statement
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The financial make up of a business defines the strength of the business and it displays how well a business is received in the market place and in some cases how a business is received in the stock market as well. There is a lot of emphasis in the business arena regarding organizations exhibiting good customer service skills. There should be more or equal emphasis on implementing, reviewing and revising financial statement/forms for the strength of the business. Many business experience failure, not because the owner and staff are not committed, but, failure can come from lack of knowledge regarding financial statements.
Financial statements, often, are not easy to understand and use. So, it is important for employers to ensure that
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Company/organizations must ensure that managers, comptrollers and chief financial officers are meeting on a regular basis to have a discuss about profits and loss that will appear on monthly income statements.
According to an article entitled, Income Statement Format, Components, and
Purpose, “the format of the income statement components allows for dissecting the revenues, expenses, operating income, and profits of an entity” It further states that income statement is one of three critical company financial statements for investor analysis. Regardless of how a company/organization defines an income statement, the use of income statements must be a familiar tool to all managers, leaders chief financial officer and other financial professionals.
MAJOR TYPES OF EXPENSES THAT ARE SHOWN ON THE TYPICAL INCOME STATEMENT
According to an article entitled, “ Income Statement”, the major types of expenses that are shown on the typical income statement are as follows:
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Financial statement users around the globe use financial statements to evaluate the performance of companies (Fundamentals of Financial Accounting, 2006). In order to locate a company’s reported assets, liabilities, expenses and revenues, statement users rely on four types of financial statements. The four financial statements include: Balance Sheet, Income Statement, Statement of Retained Earnings, and Statement of Cash Flows (Fundamentals of Financial Accounting, 2006, p. 6). Each of these reports provides different information to the financial statement user. The Balance Sheet reports at a point in time: a company’s assets (what it owns), liabilities (what it owes) and stockholder’s equity (what is left over for the owners) (Fundamentals of Financial Accounting, 2006, p.7). The Income Statement shows whether a business made a profit (net income) during a specific period of time (Fundamentals of Financial Accounting, 2006, p. 10). The Statement of Retained Earnings illustrates what portions of the company’s earnings was paid to stockholders and retained by the company for future operations (Fundamentals of Financial Accounting, 2006, p.12). Finally, the Statement of Cash Flows reports summarizes how a business’ “operating, investing, and financial activities caused its cash balance to change over a particular range of time” (Fundamentals of Financial Accounting, 2006, p.13).
This case assignment will discuss managerial accounting and different income statements a business owner may use internal to the company. Divided into two parts, part one will discuss and analyze the difference between managerial and financial accounting, the needs for financial information used for internal purposes. Additionally, it will focus on the managerial accounting profession and how its roles have changed in today’s business. Expanding on the profession, it will comment on the Certified Management Accountant (CMA) certification and how it differs from the CPA certification. Part two of this assignment
The statement displays the relationship of the net income to the changes in the cash balances. It is important to understand that cash balances can wane despite an increase in net revenue (Horngren, 2014, p. 674). The statement also aids in the evaluation of management’s use of cash and management’s generation, defining a company’s capability to pay dividends and interest to pay debts when the time comes to pay them, and forecasting upcoming cash flows (Horngren, 2014, p. 674). The balance sheet displays the status of an entity at a specific time. Contrary to the balance sheet, income statements and cash flows cover periods over time.
Management/Preparers of financial statements may have a number of factors that motivate them to manage earnings aggressively. The ultimate motive for earnings management, however, is to aesthetically enhance the performance of a company in the eyes of its stakeholders (Essays, UK,
Daniel, N, Denis, D & Naveen, L . (2010) Sources of Financial Flexibility: Evidence from Cash Flow Shortfalls*.[Online] p.2-20. Available from: http://business.nd.edu/uploadedFiles/Faculty_and_Research/Finance
Financial decision of a business organization becomes one of the important decisions that normally will represent by capital structure. Musiega, et al. (2013) claimed that choosing an appropriate capital structure will benefit the firm as it help a firm to adapt with various challenging and competitive business world thereby become more profitability. According to Zeitun and Tian (2007), managers who are able to identify the optimal capital structure will help the companies to increase the firm revenue or profitability and reduce the firm’s cost of finance. Nutshell, capital structure of a firm can influence a firm profitability; a firm health determined by a firm capital structure.
The income statement can also be known as the statement of income, statement of earnings, or statement of operations. It reports the accountant’s primary measure of performance of a business, revenues less expenses during the accounting period. This statement shows the net income of the company; revenues minus expenses. The income statement’s header includes the name of the entity, the title of the report, and the unit of measure used in the statement. The time shown is only for a specified period of time.
Analyzing financial statements is an important part of decision making because valuation of profits and losses statements are the most important drivers in business. They are used to diagnose weak spots in the current strategy in an internal perspective and play a key role in making decisions to mitigate against such losses and helps in achieve it long term objective
The directors need to be able to view the financial performance of the group in order to make relevant and informed decisions. In order to obtain this information the correct procedures, as mentioned, must be followed to ensure that assets are not overstated and liabilities
One of the most debatable topics in the accounting industry today is the extent in which we should make the financial statements understandable to the general population. The FASB currently gears its reporting standards toward...
The reputation of the product(s) of the business: Often, if the product has a household name attached, which generate positive connotations then sales and profits will be "boosted" on the basis of that reputation.
The Purpose of Financial Statements The financial statements of a business are used to provide information about the status of the business, set performance targets and impose restrictions on the managers of the firm as well as provide an easier method for financial planning. The financial statements consist of the Profit and Loss Account, Balance Sheet and the Cash Flow Statement. There are four areas of information, which we can collect from a company's financial statements. They are: Ÿ Profitability - This information comes from the Profit and Loss account. Were we can compare this year's profit with the previous years.
These accounting information are so much important for the business owner or financial statements reader to analyze the company and make the economics decision.
The information that has for financial department will determine the budget and the planning for the organization. In establish or development for the organization, the financial information that gathers will determine the size of the company.
Financial statements are intended to be understandable by readers who have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently."