Question

Q3- On your own words, explain the purpose and the importance of the income statement for a company

Answer 1

An income statement reports a business’s revenues, expenses and overall profit or loss for a specific period of time. It’s one of the three major financial statements that small businesses prepare to report on their financial performance, along with the balance sheet and the cash flow statement. An income statement doesn’t just show the total profit or loss a company generates, it also shows the costs associated with earning that revenue. An income statement is also referred to as a profit and loss statement.

PURPOSE OF INCOME STATEMENT:
The purpose of the income statement is to show the reader how much profit or loss an organization generated during a reporting period. This information is more valuable when income statements from several consecutive periods are grouped together, so that trends in the different revenue and expense line items can be viewed.
The purpose of the income statement may differ somewhat, depending on the user. An investor wants to see a consistent profit that proves the viability of the business. A lender is most interested in a business generating a sufficient profit to pay for interest expenses and a return of the loaned amount.

IMPORTANCE OF INCOME STATEMENT:
An income statement is an important financial statement as it shows the overall profitability of a company. You can also use the income statement to analyze how efficiently your business is able to translate expenses into revenues.
An income statement can help you determine if your business has the ability to generate earnings in the long term and can help you make important business decisions, like whether to invest in new, expensive equipment or whether to wait until your company is in a better financial position.