- What information is provided in the statements that will assist you in making these business decisions? What information is not provided that could assist in managerial decision making?
1. What does the income statement tell you about the company? Why is this statement important? What business decisions could be made using the income statement?
An income statement shows the financial results of the company for the particular financial year. It shows the profit or loss of the company for the particular financial period. It shows the operational efficiency of the company. It shows how much money came into the company as revenue and how much money spent as expenses and the net effect of sales and expenses. The net effect will be profit or loss.
An income statement is not necessarily to be tallied. An income statement shows either profit or loss except when the income and expenses are equal. However, a balance sheet must be tallied as the assets the company owns should be equivalent to the liabilities payable.
An income statement is important as it shows the operational efficiency of the company. Shareholders will decide to buy more shares if the income statement shows a positive figure. If it is negative, shareholders will decide to sell their holdings and the market price of the share of the company will decline. If the income statement shows high profit, then the company can decide to expand its business by the issue of new shares or it may decide to plough back the income by issue of stock dividend. Likewise, the company can decide to drop the segment which is incurring loss or it can decide to put more efforts on the segment which is yielding high income as income statement shows the income from different segments.
2. What does the balance sheet tell you about the company? Why is the balance sheet important? What business decisions could be made using the balance sheet?
A balance sheet shows ...
This solution discusses the elements fo the balance sheet, income statement and cash flow statement in 1179 words.