Advantages & Disadvantages of Income Statements
The income statement is one of the four primary financial statements used by organizations, and is one of the most important documents used outside the company. While the budget sheet helps companies plan out their costs and expenses for projects, the income statement examines a particular period of time the business went through, tallying all expenses and income received in that time and breaking them down until only net income remains.
The primary advantage of the income statement is the information it gives on revenues. The income statement is very thorough: It accounts not only for normal costs such as the cost of goods sold and expenses associated with managing operations, but also for additional costs including taxes, applied to the gross income earned. Likewise, it accounts for not only standard revenues earned from sales and similar operations but also revenues gained from interest accrued by business investments. This makes the income statement an ideal source for complete revenue information.
The income statement is one of the most important documents for investors looking to buy stock in a particular company. It makes it very easy for investors to see earnings per share, or the net income of the business divided out across all the outstanding shares that the business has. The higher the earnings per share, the more valuable the business is typically considered, especially if it is higher than competitors. This makes the income statement a go-to document for judging the condition of a company.
Unfortunately, the completeness of the income statement also comes with disadvantages. The income statement includes not only current revenues gained from sales but also the money due from accounts receivable which the business has not been paid yet -- just as it includes liabilities as expenses that have not actually been paid yet. Large one-time expenses or revenues can also drive income sharply up or down from what it should be. This makes it easy to at times misrepresent the success of the company.
The income statement may be useful for gauging earnings per share and other past financial data, but it does not give much information about future company success. The income statement gives no indication as to how the company makes it sales -- a business may be underpaying employees and overcharging customers to create its profits, practices that will eventually cause business problems but show as positives on the financial document. An investor looking the income statement should not read into it to make assumptions about employee and customer perceptions and market success.