Question

define with details the income statement and the balance sheet, highlighting the purpose, benefits, and differences between the two.

Answer 1

Income Statement

Definition:

Income Statement is basically a statement showing revenue and expenditure over the entire reporting period from both operating as well as non operating activities. It displays profitability of the organisation for a certain period. It could be monthly, quaterly, semi annually,annually.

Purpose Of Income Statement:

A. Managers use income statement to analyse the profit and expense performance of their businesses.

B. It can be used for preparation and forecast of budgets.

C. Income statement is useful for various stakeholders such as shareholders , debt providers to know the performance of the entity.

D. It is useful in making comparison with similar entities in the industry.

E. Income statement is helpful in knowing the solvency of the business.

Benefits of Income Statement:

A. It makes tax reporting responsibilities much easier.

B. It provides an easy overview of the cash flows

C. It offers a glimpse at revenue information of the company.

D. It helps in identifying the potential competitive advantage.

Balance Sheet

Definition: Balance sheet is a statement of financial position displaying the assets and liabilities of the entity.

Purpose of Balance Sheet:

A. It is useful for the management of the company in knowing the liquidity and capital resources.

B It helps the investors in analyzing the financial soundness of the company.

C. It helps banks in determining the amount of loan to be given to the entity.

D. It helps the creditors in understanding the financial strength of the entity.

Benefits of Balance Sheet

A. It helps in calculating several financial ratios.

B. It provides insight into the company's likelihood of default or even bankruptcy.

C. It helps in knowing the company's financial health by analyzing working capital and liquidity.

Difference between Income Statement and Balance Sheet

Income Statement	Balance Sheet
It is prepared for a period of time	It is prepared for a specific point in time
It helps the management with overall view of business	It helps the management with the financial health of the entity
The key items are : cost , expense and revenue	The key Items are: shareholders funds, liability, assets