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 and, usefulness, limitations, income and/or statement:

    “There has been and always will be plenty of arguments about the usefulness and harm of the spreading of the Bible. In my view the Bible will continue to cause harm when used in a dogmatic and fantastic manner; it will do good when used for didactic purposes and with sensitivity.”
    —Johann Wolfgang Von Goethe (1749–1832)

    “But, in history, practical usefulness never determines the moral value of an achievement. Only the person who increases the knowledge humanity has about itself and enhances its creative consciousness permanently enriches humanity.”
    —Stefan Zweig (18811942)

    “Much of what contrives to create critical moments in parenting stems from a fundamental misunderstanding as to what the child is capable of at any given age. If a parent misjudges a child’s limitations as well as his own abilities, the potential exists for unreasonable expectations, frustration, disappointment and an unrealistic belief that what the child really needs is to be punished.”
    —Lawrence Balter (20th century)

    “The bread-winner must toil as in the fruitless effort of a troubled dream while the expenditure of an uneducated wife discounts the income in the lack of understanding to discern the broad possibilities of an intelligent economy.”
    —Anna Eugenia Morgan (1845–1909)

    “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)