Question

What is the purpose of the income statement? Briefly identify and describe the major types of expenses that are shown on the typical income statement.

Please don't hand write. Thank you.

Answer 1

Ø The income statement provides all the stakeholders, the summary of the company’s performance during the period. All the activity and the quantum of the activity performed by the company during the period is summarized in the income statement

Ø The income statement is a good statement for comparison of the company under analysis with its past year performance and also among the peer companies operating in the industry. All the analysts in the industry or tracking the stock of the company use the income statement to analyze the numbers and it’s peer’s numbers. The comparison of the margins and the growth in revenue and expenditure can be quickly compared if the income statement is presented in the same format.

Ø The income statement is also important for forecasting purposes of any company. Taking the past performance numbers of the company the future growth and the revenue projections of the company are forecasted. For example, in the sample income statement, the finance manager or the analyst can forecast the projected numbers of the year by analyzing the past trends of revenue and expenses

Ø The income statement also shows the classification of the revenue and the expenses which shows how each department of the company is performing. It gives a good indication to the manager or the management on which expense of the company is growing at an unexpected rate and which expense needs to be cut down in future

Ø The income statement is important for ratio analysis, valuation, equity research of the company. All analysts and research houses who track the company make extensive use of the income statement to analyze, forecast and do a valuation of the company which is used to make a future economic decision on the company. Various income ratios like gross margin, EBITDA margin, Interest coverage ratio, and other income ratios can be easily derived from the sample income statement which is an important source of analysis

Ø The income statement forms a vital part of the annual report of a public listed company. Moreover, companies who are publicly listed companies are bind to report the financial statement of the period ending. The income statement is the most important part of the three financial accounts as it gives the user the snapshot and the performance result of the company. The cash flow and the balance sheet are also formed with the help of the income statement numbers.

Ø Based on the income statement of the company there are a lot of decision and the business plans which are dependent on the income statement. The management can take decision for inorganic or organic growth also the market reputation and the analyst consensus is also very much dependent on the numbers reported on the income statement.

Ø The income statement serves many purposes and also provide valuable insights to various internal and external parties and stakeholders.

Major Typical Expenses that are shown in a Typical Income Statement are as Follows.

Ø Cost of Goods Sold (COGS)

Ø Marketing, Advertising, and Promotion Expenses

Ø General and Administrative (G&A) Expenses

Ø Depreciation & Amortization Expense

Ø Interest Expense

Ø Other Expenses

Ø Tax Expense