Income And Cash Flow Statement

433 Words2 Pages
The Income Statement. It shows a business’s sources of income as well as the expenses it has incurred over a given time period that is being examined. The difference between the total incomes of the business and its expenses gives its net profit. The main aim of a business is to maximize its profit. The importance of an income statement therefore is to help in making an analysis of how the different decisions the business makes affect its level of profitability. The Cash flow Statement. It is a record of the amount of cash flowing in and out of a business over a given time period being examined. The statement is important to a business since it shows the ease by which a business can create an adequate level of liquidity or cash to finance its running operations. It also helps determine the amount of money available at the end of the business’s financial period which may be used for a subsequent period’s investment. Advantages of the income and cash flow statements. One advantages of the income and cash flow statement they are used to measure the level of performance of the business. Increased levels of profit derived from the income statement and an increased level of cash flows as shown by the cash flow statement are taken to mean that the business is performing well. The vice versa is also true. Another advantage is that both statements are also used by the management to evaluate the trend of the business by comparing its performance in the current financial period to that of the previous period. The statements are also used to compare a business’s performance to that of its competitors so that appropriate action can be taken. Limitations of the income and cash flow statements. A limitation facing both statements is that they are not very accurate in making comparisons. It can be argued that it would not be appropriate to compare a
Open Document