Application of Financial Statement

¶ … Financial Statement

The four financial statements are the balance sheet, income statement, statement of cash flow, and statement of owner's equity. Briefly, the balance sheet is comparison of assets to liabilities and equity. This statement is indicative of a company's position at a specific time. The income statement is a record of a company's operations over a given period of time. It shows a company's expenses, losses and revenues and is indicative of the company's net income during that period of time. The statement of cash flows is intended to provide information about a company's cash receipts and cash payments for operations, investments and financing during an accounting period. Finally, the statement of owner's equity is intended to show changes in owner's or shareholder's equity from one fiscal year to the next. Owner contributions and any additional capitol, such as the sale of new shares, are added to the equity, while dividend payments and owner withdrawals are subtracted. Financial statements are generally supplemented by information from management to explain anomalies in revenues that may have occurred during the course of the accounting period (U.S. Security and Exchange Commission, 2007).

Both internal and external entities use these statements in order to inform the decision making process. These documents provide pertinent information on the financial position (balance sheet), profitability (income statement), and operating, investing, and financing activities (statement of cash flow) of a company. No one statement is enough to provide sufficient information to get a complete picture of a company's financial position, however, taken together the analyst has the information needed to understand the company's profitability, operating, investing, and financing activities.

Purpose of the Income Statement

The income statement represents the flow of resources: revenues, expenses and profits, which reveal financial performance of over a specific period of time. In addition to reporting profit or loss results the income statement helps decision makers focus on overall revenues and costs involved in generating these revenues. The income statement provides much of the basic data need to calculate the financial ratios used in planning and controlling activities. An income statement begins with total revenue generated during a year, quarter, or month, and then deducts all the costs related to producing the revenue. The final figure on the income statement, net income after taxes, is the so called bottom line (Kurtz, 2010).

Application of the Income Statement in Everyday Life

Personal Finance is an important aspect of everyday life. A personal finance statement is essential to evaluating an individual's ability to afford both large and small purchases and should drive a personal budget. Budgeting is the process of assigning monies for a particular purpose. In order to make the best use of one's income it is crucial not to spend more money than one makes. Deficit spending can be easily done, and is a financial trap that can take decades to overcome. Whether making a budget for an annual salary of $24,000 or an annual salary $240,000, the fundamental expenses are the same: housing, transportation, groceries, saving / investing, insurance, taxes, and personal. While this list is comprehensive it is by no means definitive. If items are missing they may be prioritized and included accordingly.

Application of the Income Statement in Business

The income statement is an indication of a firm's profitability; however, this statement also provides a number of additional performance measures. For example revenue is a key measure of growth that reflects a firm's success in expanding its market. Comparisons of expense numbers from year to year indicate a firm's success in controlling costs. Operating income measures managers' performance in conducting a firm's operations. Data from this statement provides the basis for a variety of decisions. Because earnings underlie a firm's ability to generate cash flows for dividends and growth, equity investors are interested in the income statement. Lenders are also interested in the income statement because a firm's ability in a timely manner ultimately depends on its profitability. Moreover, managers must constantly evaluate the prices they set for the firm's products and services. Pricing affects both profitability and growth. The income statement tells managers and investors how well the firm's pricing strategy has accomplished stated objectives. Corporations always strive to reduce the costs of their operations, and the income statement can also measure the success of cost-cutting initiatives. Finally, managers often use the income statement when setting dividends. Net income is a primary measure of a firm's ability to pay dividends. Some firms set a dividend target equal to a certain percentage of net income ("Uses of the Income Statement in Financial Accounting," 2010).