Financial Statements: an Income Statement

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Elements of Income Statement

An income statement includes the money that was spent and earned by an organization for a certain duration. The profits are derived by subtracting the money spent from the money earned. Without such a statement organizations would not know when they are making losses and profits hence they are quite vital. The timeline that is reflected by this statement can be within a duration of four months or six months.

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There are a few principles of income statements that have to be considered when drafting the statement. The principles are namely revenue, losses, gains, and expenses. Gibson (2009) points out that revenue includes all the cash that a business brings in from the purchases of goods and services made by customers. These earnings are vital because they are the ones that are weighed against the expenses to determine whether the business is running at losses or profits.

Expenses mean the money that is used by a business to pay for the items or services that are needed by the business in order to remain operational. They include bills that have to be paid such as electricity bills and the money that is paid out to vendors and other suppliers. Businesses try to minimize their spending because when money continues to be drawn out of the business the profits may decline especially when the business is using more cash than its earnings.

Gains are expressed as the swell in the possessions of the business compared to what the business has as loans from other business entities. The money that is borrowed from other sources is called debt. Gains have been confused with proceeds but the truth is that these are two different issues that coexist in the same discipline (Schroeder, Clerk, & Cathey, 2011).

Losses on the other hand mean the amount of money that is obtained from the sales of goods and services and it’s usually more than the money that was used as input to facilitate the purchase of the things that are needed by the government. A good example is when a company sells commodities at a lower price than its buying price hence there are no proceeds at all. According to Wessels (2000), losses do not include the money that is spent by the organization in paying its bills such as rent and license fees.

Losses are the most crucial principle in business because everyone is out to make profits regardless of all events in a business. There is so much competition among businesses hence business owners are doing all they can to acquire more customers. Some lower the prices of their goods and services but in the long run, it’s what a business earns at the end of the day. If a business continues to have more losses there is no need for it to remain in operation.

Comparing and contrasting the use of Income Statements and Balance Sheets

A balance sheet is a monetary record that is used to display the possessions of an organization against what it has to pay back to the lenders. This includes the money that has been lent out by the organization. Warren (2008) argues that the balance sheet does not account for the sales hence it can not provide reliable information about a business entity. An income statement is more detailed than a balance sheet because it accounts for all activities within a given time frame as opposed to the balance sheet which offers imprecise information. Thus, a balance sheet enables a company and interested parties to assess the financial strength of a business.

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The similarity between a balance sheet and an income statement is that both emphasize the losses that are encountered by a business. Furthermore, the reports are drafted after a particular timeline-like say after four months or after six months. The reports are used to weigh the progress of a business.

The Relationship between Statement of Cash Flow and Working Capital

A cash flow statement deals with how money is injected into a business and how the same money is ejected out of the business. This statement is vital because it’s referred to when adding up values to determine the proceeds obtained by a business. It would be difficult for business owners and analysts to determine the proceeds that were made within a given time frame without considering the inputs and the outputs of a business.

Cash flow and working capital are dependent on each other because a business’s sole intention is to gain proceeds. Cash flows are categorized into three categories namely those that are as a result of franchising items and services, Cash flows from lenders who allow the business to obtain cash from them to facilitate the operations of the business. Christy (2009) argues that money is ejected in so many ways like through employees’ payments besides being injected through the sale of commodities and services. For a business to be on the right track the money that is injected into a business should be less than the cash that is ejected from the same business.

Working capital refers to the properties that are owned by the business but they can still be sold to recover the money that is stored in form of assets such as houses vehicles and pieces of land among many others. This capital provides a sufficient source of money that is injected into a business. This conversion of liquidities is the last option after it is certain that financial institutions have refused to lend money to some businesses. More money is ejected out of a business to pay for the liabilities and other expenses (Schroeder, Clerk, & Cathy, 2011).

Suggested Change that would make the Income statements, Balance sheets, and Statement of Cash Flows to be more useful

Nowadays financial statements can be generated for every transaction at the touch of a button. The above-mentioned financial statements have not been reliable. After all, they don’t reflect the money that is available because they incorporate expected earnings that are to be repaid by debtors.

Therefore, it would be better if the statements referred to the cash that has already been obtained because debtors may fail to fulfill their promises. Every single cent that is injected or ejected into the business should be accounted for because when they are ignored the report that is drafted at the end could be misleading such that it could cover up losses by implying that the business has been making huge returns.

References

Christy, C.G. (2009). Free Cash Flow: Seeing through the Accounting Fog Machine to find Great Stocks. New Jersey: John Wiley & Sons.

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Gibson, H.C. (2009). Financial Reporting and Analysis. Mason, OH: Cengage learning.

Schroeder, R., Clark, M., & Cathey, J. (2011). Financial Accounting Theory and Analysis: Text and cases. (10th Ed.). Hoboken, NJ: John Wiley & Sons.

Warren, S.C. (2008). Survey of Accounting. Mason, OH: Cengage Learning

Wessels, J.W. (2000). Economics. New York: Baron’s Inc.

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BusinessEssay. (2022, March 24). Financial Statements: an Income Statement. Retrieved from https://business-essay.com/financial-statements-an-income-statement/

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BusinessEssay. 2022. "Financial Statements: an Income Statement." March 24, 2022. https://business-essay.com/financial-statements-an-income-statement/.

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