Question

1- What is the concept of sustainable income? Please describe it in your own words. Can you give an example of what this number may look like by using the income statement of a real-life company?

2-There are different tools for analyzing the financial statements of a company, such as horizontal analysis, vertical analysis, ratios for measuring financial health and profitability, and so forth. Before we begin using these tools, however, it is important to know the purpose of each tool.

Why do we need different tools for analyzing the financial statements? Don't the numbers in the financial statements speak for themselves?

Answer 1

(1).

Sustainable income is the very important term used in practical corporate life. Sustainable income refers to likely level of income to be obtained in the future from the normal operations of the business. In other words we can say that level of income which is very essential to obtained from the normal operations of the business. As we know that income statement of the company shows various items such as income from operations, income from discontinued operations, income & gains from extraordinary items etc. Hence from income statement of a company we can know sustainable income. In case of multi-step income statement, there is clearly classification between income from operations and net income hence we can know sustainable income as income from operations. Such income from operation is known as income before exra-ordinary items and income before discontinued operations.

(2).

Why do we need different tools for analyzing the financial statements? Don't the numbers in the financial statements speak for themselves?

As we know that there are various tools for analyzing the financial statements such as horizontal analysis, vertical analysis, accounting ratios, trend analysis and cash flow analysis etc. Each tools of financial statement analysis serve for different motives that is why we need to use these different tools for example; horizontal analysis is used for comparative analysis, it helps in making analysis of performance of a company over various years such as it helps in knowing financial position & profitability over the years that is why horizintal analysis helps for specific purposes. In same manner vertical analysis helps in analyzing the various components of income statement and balance sheet in compare to total sales,total assets and total liabilities etc, hence we can say that vertical analysis serves for different porpose which is not obained with the help of horizontal anslysis. Trend analysis shows long-term trends in the profitability & financial position of a company hence we can say that trend analysis also serve for specific motive. Apart from ratios analysis and cash flow analysis also serve for specific motive such as ratios are used to know relationship between various important items of income statement and balance sheet etc wheras cash flow statements shows detailed analysis of cash position and flows of cash for a speciified time period.

So overall we can say that each tools of financial analysis is designed to serve specific motives and such motives can not be fulfilled through financial statements that is why these tools are used by the companies & stakeholders.