Income Statement - Usefulness and Limitations of Income Statement

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).
- INCOME STATEMENT GREENHARBOR LLC - For the year ended DECEMBER 31 2010 € € Debit Credit Revenues GROSS REVENUES (including INTEREST income) 296,397 -------- Expenses: ADVERTISING 6,300 BANK & CREDIT CARD FEES 144 BOOKKEEPING 2,350 SUBCONTRACTORS 88,000 ENTERTAINMENT 5,550 INSURANCE 750 LEGAL & PROFESSIONAL SERVICES 1,575 LICENSES 632 PRINTING, POSTAGE & STATIONERY 320 RENT 13,000 MATERIALS 74,400 TELEPHONE 1,000 UTILITIES 1,491 -------- TOTAL EXPENSES (195,512) -------- NET INCOME 100,885

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:

Read more about this topic:  Income Statement

Famous quotes containing the words usefulness, limitations, income and/or statement:

    “This monument, so imposing and tasteful, fittingly typifies the grand and symmetrical character of him in whose honor it has been builded. His was “the arduous greatness of things done.” No friendly hands constructed and placed for his ambition a ladder upon which he might climb. His own brave hands framed and nailed the cleats upon which he climbed to the heights of public usefulness and fame.”
    —Benjamin Harrison (1833–1901)

    “To note an artist’s limitations is but to define his talent. A reporter can write equally well about everything that is presented to his view, but a creative writer can do his best only with what lies within the range and character of his deepest sympathies.”
    —Willa Cather (1876–1947)

    “I had always been so much taken with the way all English people I knew always were going to see their lawyer. Even if they have no income and do not earn anything they always have a lawyer.”
    —Gertrude Stein (1874–1946)

    “He that writes to himself writes to an eternal public. That statement only is fit to be made public, which you have come at in attempting to satisfy your own curiosity.”
    —Ralph Waldo Emerson (1803–1882)