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)

    Human life consists in mutual service. No grief, pain, misfortune, or “broken heart,” is excuse for cutting off one’s life while any power of service remains. But when all usefulness is over, when one is assured of an unavoidable and imminent death, it is the simplest of human rights to choose a quick and easy death in place of a slow and horrible one.
    Charlotte Perkins Gilman (1860–1935)

    Growing up means letting go of the dearest megalomaniacal dreams of our childhood. Growing up means knowing they can’t be fulfilled. Growing up means gaining the wisdom and skills to get what we want within the limitations imposed by reality—a reality which consists of diminished powers, restricted freedoms and, with the people we love, imperfect connections.
    Judith Viorst (20th century)

    The question for the country now is how to secure a more equal distribution of property among the people. There can be no republican institutions with vast masses of property permanently in a few hands, and large masses of voters without property.... Let no man get by inheritance, or by will, more than will produce at four per cent interest an income ... of fifteen thousand dollars] per year, or an estate of five hundred thousand dollars.
    Rutherford Birchard Hayes (1822–1893)

    The force of truth that a statement imparts, then, its prominence among the hordes of recorded observations that I may optionally apply to my own life, depends, in addition to the sense that it is argumentatively defensible, on the sense that someone like me, and someone I like, whose voice is audible and who is at least notionally in the same room with me, does or can possibly hold it to be compellingly true.
    Nicholson Baker (b. 1957)