Income statements are just one of the many financial statements used to evaluate a company’s financial strength. The other one is a balance sheet that is also vital in the process of assessing the financial position of a company. Income statements are also known as profit and loss accounts, earning statements or statement of operations. An income statement is calculated by deducting expenses from revenue. The resulting amount will be the net income. The following are facts that define income statements.
- Most companies have to create revenue in order to keep business running. It is these revenues that are needed to cater for expenses, interest paid on debts and the taxes to be paid to the local authorities. When all the costs of running a venture are paid back, the amount that is remaining is the net income. This is usually available theoretically to most shareholders. This is the case because the management of the firm usually chooses to hold on to the earnings for investing in the business in future.
- Those who would like to participate in active investing and choosing must know how to read the financial statements and income statements. The necessity of knowing this cannot be overruled.
- The ability of a company to generate revenue for a long period of time is the key force behind stock and bond prices. The operating profit is the only source of paying back the loans and if it cannot be the case then the company will be declared bankrupt or sold off. The income gotten from here is the only way that shareholders can be compensated. This therefore means that if a firm cannot earn enough revenue to cater for the risks incurred by the shareholders then the shares drop in value. If the opposite is happening- that is the company is growing and has good projections, then there is a likelihood of better stock and bond dealing prices that shows an increased making of profits.
- It is important to know that income statements are not the same as cash flow statements. A company can have a better income statement but fail to realize much better cash flow. This statement applies to either ways you look at it thus there is a need to understand the difference between the two. This knowledge is absolutely vital in the running of a business and could be applicable when looking for more shareholders. There is therefore a need to look at the two closely but differently.
Income Statement Examples
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