Application of Financial Statement Essay Example | Topics and Well Written Essays - 2250 words

Application of Financial Statement - Essay Example The Income Statement The income statement is â€Å"a financial statement listing all revenue and expenses for a fiscal period leading to net income or net loss: a statement that describes the operations of a business over a period of time (fiscal period)† (Kravitz, 1999 p63). The income statement is therefore a financial statement that shows the results of the operations of a business. This involves financial information about the income that a business makes and the expenditure that the business incurs over a given period of time. In effect, the income statement matches the revenue of a business with its expenses and provides the net income or net loss. In other words, the income statement provides an insight into the kind of revenue inflows and outflows that were incurred during the normal trading activity of the business. Another aspect of the income statement is that it is a period statement. In other words, it captures the financial picture of a business's trading activit ies over a defined period of time. This means that the income statement is mainly concerned with how a business performed in trade over the specified period of time. Tracey (2009) identifies that the main purpose of the income statement is to identify the profit or loss made by a business in a given period of time (p13). This means that the income statement identifies the performance of a business in terms of how much profits or losses that the business made over the specified period for which the accounts were prepared. This shows clearly that the income statement is mainly a tool for the measurement of the financial viability or otherwise of a given business in a stated period of time. â€Å"The income statement summarizes the sales revenue and expenses of a business for a period, usually 1 year† (Tracey, 2009 p13). This indicates that most businesses prepare their income statements over a period of 12 months. The GAAP and other legal statutes require businesses to prepare financial statements once every 12 months. However, in some instances, a business might opt to prepare an income statement for periods that are less or more than the 12 month period. If a business began trading in the middle of they year, they many prepare income statements for a period that is less than 12 months. Such a financial statement might be pro-rated for taxation and other financial purposes. This means that the number of months for which the accounts were prepared will be identified and divided by the 12 months period to find out the true worth for certain statutory purposes like tax. Typically, the tax rate that is invoked on such a business is calculated by identifying the number of months for which the accounts were prepared and dividing it by 12 before the figures are multiplied by the annual tax rate. The main motive is that income statements must be prepared over a given period and there should be definite cut offs within which the income and expenditure captured ar e compared. Tracey (2009 p13) identifies four main steps in the preparation of income statements. In the first step, the sales revenue is matched with the cost of goods or services that were sold. In other words, this involves the matching of income or payments made by customers to the business against the cost the business incurred in producing the goods sold.