Purpose of Income Statement

What is the Purpose of Income Statement?

The income statement is one of the important financial reports of the company. It is prepared with the purpose of providing the summary of all the revenues and the expenses over time to ascertain the profit or loss of the company. Also, it is used to measure business activity over time depending upon various requirements of users of an income statement.

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

Purpose of Income Statement

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Source: Purpose of Income Statement (wallstreetmojo.com)

Purpose of Income Statement for Various Stakeholders

The purpose of income statement is 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 company’s performance 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 its annual report 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 for investors willing to invest in the company. In addition, the income statement serves as a good source for a fundamental analysis of the company. The investor can analyze the income statement and can make an economic decision on whether they should invest in the company.

#3 – The Lender

Purpose of Income Statement - Liquidity

Every quarter banks or financial institutions demand the income statement be submitted for the review and the utilization proceeds of it. After analyzing the income statement, the bank decides whether it should extend the limit enjoyed by the company or amend the sanction terms as per the company reporting numbers.

#4 – The Creditors

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

Importance of Income Statement

  • 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 action performed by the company during the period are summarized in the income statement.
  • It is a good statement for comparing the company under analysis with its past year performance and among the peer companies operating in the industry. All the analysts in the industry track the company’s stock using the income statement to analyze the numbers and its peer’s numbers. They can quickly compare the margins and the growth in revenue and expenditure if the income statement is presented in the same format.
Box IPO Comparable Analysis Comp
  • The income statement is also essential for the forecasting purposes of any company. Taking the past performance numbers of the company, the future growth, and the company’s revenue projections are forecasted. For example, in the sample income statement, the finance manager or the analyst can predict the year’s projected numbers 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 provides valuable insights to various internal and external parties and stakeholders. A company cannot survive or exist without reporting or preparing its income statement. As a result, every business that wants to control and reflect the true picture of the company’s income statement needs to have proper command over the numbers of the finance department.

This article has been a guide to the Purpose of the 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 –