An income statement is a financial account produced by an organization that shows its financial performance over a specific period of time.
What is entailed in the income statement is a summary of the revenue and expenses that are gotten as a result of operating and non-operating activities. It is during comparison of the two figures that a net profit or net loss will be declared.
Organizations can benefit from producing an income statement. However, just like everything else, they can also have their downside.
Below is a list of the pros and cons of income statement production.
· It exposes the revenues of the organization
Exposing the revenues of the organization is not a bad thing. In an income statement, the information brought forward is a direct reflection of the revenues of the organization. The document is thorough as it shows people all the revenues that were generated in that period as well as the expenses that were incurred in the same period of time.
It is basically the best tool used to examine the financial situation of an organization.
· Allows analysis from investors
The income statement is another way of knowing how financially capable an organization is. For instance, some figures like the net income are bluntly written in the document thus reducing the amount of research an investor has to do.
· An efficient way to track the performance of an organization
An income statement can easily show the performance of an organization. If profit margins are good, the company is on the right track. If not, then something has to be done.
To know whether the company is stable and well-performed, reviewing its income statements for a longer time will give you all the answers.
· Can be used as a forecast
Income statements can be used as a forecast for the future. It can be used to generate budgets for the next financial year.
They can also be used to anticipate issues that may arise in the future. This allows the company to put in strategies and have a possible response plan. It also ensures the organization is able to deal with problems before they are uncontrollable.
· Does not evaluate success factors that are non-revenue
The income statement only looks at factors related to the generation of revenue. For instance, it does not review the way an organization earns its’ sales from consumers.
There are a lot of other factors that may affect the performance of a company positively or negatively that is not related to revenue generation.
· It is generated more frequently
Although most companies generate income statements annually, there are organizations that generate the report every quarter. Others generate the statements every month which can be quite tasking and time-consuming.
· It can misinterpret the company’s value
Income statements also include money that is yet to be received. It also includes liabilities that have not yet been paid.
This makes it hard to actually know how an organization is faring.
All in all, income statements provide a peek into the financial situation of an organization. It may not cover all aspects that affect the organization but it covers the financial aspect. That is what makes it one of the most important tools in an organization.