An income statement refers to the type of financial statement that that presents the financial performance of a company in a given accounting period. The financial performance of a company can be evaluated by reviewing the revenue that the business has generated as well as the expenditure that the business has incurred during the specified financial period from both operating as well as non-operating activities (APA practice, n.d.). The income statement is equally an important way of reporting the financial position of a firm just like balance sheets and other financial statements (Edupristine, 2017). The major purpose of an income statement is to show whether the firm in question has generated income over the financial period under review.
Income statements evaluate several aspects of the firm that enable it to indicate the financial position of that firm. First, the statement records the total revenue that the business gas generated over the financial period under review. Revenue constitutes all the cash inflow that the firm has generated because of offering services or provisions of goods that form the company’s core mandate (APA practice, n.d.). The total income before the subtraction of any expense constitutes the firm’s revenue. Secondly, the income statement records operating income. The operating income constitutes the difference between the revenue and total expenses of the firm. Therefore, operating income is obtained by subtracting expenses from the total revenue for the firm during that period (Edupristine, 2017). Where the expenses are higher than the revenue, the firm is said to have incurred operating loss. The net income is obtained from the income statement by subtracting the applicable taxes from the operating income.
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The items on the financial statement identified above are very critical is assessing the financial position of a firm. For instance, the items and the respective computations on the financial statement indicate whether a firm has made profits or loss during the under financial review (APA practice, n.d.). Moreover, the income statement indicates items that led to the expenditure and consequently reduced the bottom line (Edupristine, 2017). This information is critical to understanding the financial performance of the firm for any given financial period.
Income statement reveals critical information as major indicators of the financial position of the firm. First, the income statement indicates how well the firm is using its assets in the generation of income. The comparison between the depreciation values of assets the revenue generated by such assets enable the determination of the revenue that the asset is generating in comparison to its loss of value. Secondly, the statement is effective in identifying the products that the business is providing but contributing to loss or high profits for the business. Thirdly, the items on the income statement help in the assessment of the effectiveness of the methods of debt collection from debtors. Moreover, the financial statement helps in the determination of the specific products that are the highest contributors of revenue to the business (Edupristine, 2017). The financial statement may also contain a summary of information from previous financial periods (APA practice, n.d.). This information is critical in comparison and helps the business to understand the financial progress it has made over a given period.
Third parties outside the business also use income statements. Interested parties outside the business use the information contained in the income statement in making critical decisions that affect the business. For instance, creditors use the information on income statements in assessing the firm’s ability to repay the credit that it is seeking. Secondly, governments use income statements in determining the amount of tax that a firm should pay (Edupristine, 2017). Lastly, stock investors also assess the financial position of a company by reviewing their income statements before deciding on whether or not to invest in the given firm.
The income statement of the Ford Motors for the year 2012 is a good one in demonstrating the different aspects of an income statement and a firm’s financial health. The items on this income statement include total revenue from the automated segment units particularly from wholesale as well as other revenue from other automotive and financial services. The statement further indicates the total income before tax as well as the income after tax as attributed to the company (Ford Motors, 2012). Most importantly, the statement indicates the shareholder value during that financial period.
This statement provides critical information that indicates the financial position of the Ford Motors during this period. For instance, it indicates that the company was able to gather a total of $ 134,252 (in thousands) in revenue. The total income before tax was $ 7,720 (in millions). Furthermore, the statement indicates that the business was able to generate 5,665 (in millions) net income. The statement also depicts the overall expenditure of the company in that year as 24.3 billion. Finally, it indicates that every shareholder generated an income of 23% of their total shareholding during that period (Ford Motors, 2012). As such, the information presented in this income statement can be used in the evaluation of the financial position of Ford Motors during that period.
In summary, the income statement contains the firm’s total revenue for that period as well as the total expenditure for the company. The statement further indicates the net profit or loss that the company has incurred during the given financial period. This information is critical in assessing the financial position of the firm during the accounting period.
References
APA practice. (n.d.). How to Read and Use Your Income Statement. Retrieved February 26, 2018, from http://www.apapracticecentral.org/business/finances/income-statement.aspx
Edupristine. (2017, November 29). Income Statement: Meaning, Method, Advantages, Disadvantages, etc. Retrieved February 26, 2018, from https://www.edupristine.com/blog/income-statement-in-detail
Ford Motors. (2012). Financial statement. Retrieved February 26, 2018, from http://corporate.ford.com/content/dam/corporate/en/investors/reports-and-filings/Annual%20Reports/2012-annual-report.pdf
