Usefulness and Limitations of Income Statement
Income statements should help investors and creditors determine the past financial performance of the enterprise, predict future performance, and assess the capability of generating future cash flows through report of the income and expenses.
However, information of an income statement has several limitations:
- Items that might be relevant but cannot be reliably measured are not reported (e.g. brand recognition and loyalty).
- Some numbers depend on accounting methods used (e.g. using FIFO or LIFO accounting to measure inventory level).
- Some numbers depend on judgments and estimates (e.g. depreciation expense depends on estimated useful life and salvage value).
Guidelines for statements of comprehensive income and income statements of business entities are formulated by the International Accounting Standards Board and numerous country-specific organizations, for example the FASB in the U.S..
Names and usage of different accounts in the income statement depend on the type of organization, industry practices and the requirements of different jurisdictions.
If applicable to the business, summary values for the following items should be included in the income statement:
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