Purpose of Income Statement

What is the Purpose of Income Statement?

Income statement is one of the important financial reports of company which is prepared with the purpose of providing the summary of all the revenues and the expenses over the time period in order to ascertain the profit or loss of the company and measuring its business activity over the time period depending upon various requirements of users of income statement.

The income statement is the statement of all expenses and income over some time. Every business when preparing the financial statements starts with preparing the income statement for that period. The income statement forms an integral part of the books of accounts. The income statement serves as an indicator for the business, which shows the performance of the company for the period ending every year or whenever the statement is prepared.

Purpose of Income Statement

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For eg:
Source: Purpose of Income Statement (wallstreetmojo.com)

Purpose of Income Statement for Various Stakeholders

The purpose is also to serve as a reporting tool for various stakeholders: –

#1 – The Management

Purpose of Income Statement - Management

source: Colgate SEC Filings

The most vital viewer of the income statement is the management. It gives the directors and the executive a very clear picture of the performance of the company during the period. The income statement of the period serves as an indicator of how the strategy which was planned by the management of the company at the beginning of the period has paid off and where is the scope of improvement

#2 – The Investor

Purpose of Income Statement - Investors

If the company is a publicly-traded entity, then the annual report of the company needs to be prepared and published annually before the books are closed. The most crucial purpose of the income statement is that it serves as a good source of analysis of the investors who are willing to invest their stake in the company. The income statement serves as a good source to do a fundamental analysis of the company, the investor can analyze the income statement and can make an economic decision on whether he should invest his stake in the company or not.

#3 – The Lender

Purpose of Income Statement - Liquidity

Every quarter the banks or the financial institutions demand the income statement be submitted for the review of the bank and the utilization proceeds of it. The bank after analyzing the income statement decides whether it wants to extend the limit which is enjoyed by the company or does it needs to amend the sanction terms as per the company reporting numbers

#4 – The Creditors

The creditors of the company, who are mainly short-term creditors like the suppliers and the subcontractor, also should have a close look at the numbers reported by the company. The income statement shows the creditworthiness of the company and the capacity of the company to repay its current obligation. The income statement can also serve as an indicator for the suppliers and the creditors whether to maintain the relationship and the credit terms with the company.

Importance of Income Statement

  • Most important is that the income statement provides all the stakeholders with a 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 are summarized in the income statement.
  • It 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.
Box IPO Comparable Analysis Comp
  • The income statement is also essential 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.
Colgate - Revenue Projections - complete
Ratio Analysis Framework 1

Thus, the income statement serves many purposes and also provide valuable insights to various internal and external parties and stakeholders. A company cannot survive or exist without reporting or preparing its income statement. A proper command on the numbers of the finance department and manager is what is demanded by any business to have control and to reflect the true picture of the company’s income statement.

This article has been a guide to the Purpose of Income Statement. Here we discuss the purpose of the income statement for various stakeholders and also the importance of the income statement. You may learn more about Accounting from the following articles –