Anincome statement, which is also referred to us as the profit and lossaccount is a financial declaration that can show how an organizationhas performed financially after a specified accounting period. Ananalysis of the expenses and revenues is done after a firm hasengaged itself in operating and non-operating activities (ICAA,2012).
First,this report is used to indicate how much deficit or gain anenterprise has generated in a particular reporting period. Theprocedure followed to arrive at this figures can systematically showhow the value is arrived at. Secondly, the management of theenterprise can use the information to understand their financialposition and the specific areas where amendments need to be made.Lastly, it is the basis of making a variety of decisions depending onthe user and his target.
Importanceof Items in the Income Statement
Thereport has numerous elements, and I feel that their significancediffers when certain users are considered because their objectivesare dissimilar to one other. For instance, an investor who wants tofund an organization by buying its shares will focus on the earningsper share. Likewise, a manager will emphasize on the gross profit andoperating expenses if his aim is to increase the returns oninvestment. When the costs rise continually, it is necessary to lookat the areas that can be cut back and stress on how to boost thesales. Lenders and suppliers will be interested in the amount ofprofit generated to assess if they will be paid their dues at theappropriate time or not. Similarly, governments and accountants makeuse of it to determine the tax payable by the company. Therefore, inconcluding that an element is better than the other, it will dependon the perspective from which you base your argument.
Thisis two or more than balance sheets that have been prepared ondifferent dates and compared to one another to show the financialcondition of an enterprise. The items are presented side-by-sideaccording to their respective years so that they can be easilyanalyzed whether they rose or diminished. For example, the statementof financial position could be provided annually for the last fouryears to study the movements of the items. This can help determinethe trend of the current assets and the cause of the variation thatled to increase or decrease of the figures.
TheHorizontal and Vertical Analysis of the Balance Sheet
Verticalanalysis is the comparative scrutiny where the items that appear inevery line of the statement are expressed in percentage of the totalassets. This is imperative in circumstances where one needs to findout the relative changes in an account for a particular period. Thisis only done using the data of only one year. On the other hand, thehorizontal examination is used to compare the ratios of the elementsover different time periods like two consecutive years. However, moreyears can be used depending on the information needed by the users.
Thereis a very clear demarcation between the two. An item like cash of aprecise year can be expressed as the percentage of the other periodto see how it has been changing over time in the case of horizontalanalysis. But for vertical, an item can only be restated regardingthe total assets of that distinct year instead of comparing it toanother.
ICAA.(2012). CharteredAccountants Financial Reporting Handbook.John Wiley & Sons Publishers.