Income Statement Flashcards
The income statement reports what?
Reports revenues and expenses (success or failure of the company’s operations) to show how successfully a company performed during a period of time- annually, quarterly, or monthly.
The income statement reports how successful it is at generating profit or net earnings from its sales.
Why are financial statement users interested in a company’s profit? Investors buy and sell shares based on?
Investors are interested in a company’s past profit because these numbers provide information that may help predict future profits.
Investors buy and sell shares based on their beliefs about the future performance of a company. If you believe that a company will be even more successful in the future, and that this success will translate into a higher share price, you should buy that company’s shares.
What’s in the heading of every statement?
The heading of every statement identified the company, the type of statement, and the time period covered by the statement. Sometimes another line is added to indicate the unit of measure. When it is used, this fourth line usually indicates that the data are presented in thousands or in millions.
Are cents included in the dollar figures recorded in financial statements?
No it’s not included. It is important to understand, however, that cents should be and are used in recording transactions in a company’s internal accounting records. It is only for financial reporting purposes that financial statement amounts are normally rounded to the nearest dollar, thousand dollars, or million dollars, depending on the size of the company. External reporting condenses and simplifies information so that it is easier for the reader to understand.
Like investors, lenders also use the income statement to predict the future. Why does a bank loan money to a company?
When a bank loans money to a company, it does this because it believes it will be repaid in the future. If it thought it was not going to be repaid, it would not loan the money. Thus, before making the loan, the bank’s loan officer must try to predict whether the company will stay in business long enough and be profitable enough, to repay the loan. Thus, reporting recurring and increasing profits will make it easier for a company to raise additional cash either by borrowing or by issuing shares.
Amounts received from issuing shares are not revenues. Amounts paid out as dividends are not expenses because it was not incurred to generate revenue. So both are not reported in the income statement. Instead where are they reported in?
Instead, both of these transactions are reported in the statement of changes in inequity.
Are the company’s operations profitable? What’s is the info needed for a decision, tools use for decision and how to evaluate results?
Info needed for decision: income statement
Tools to use for decision:
The income statement indicates the success or failure of the company’s operating activities by reporting its revenues and expenses.
How to evaluate the results:
If the company’s revenues exceed its expenses, it will report a profit; otherwise it will report a loss.
