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Select Either the Balance Sheet or Income Statement and Explain How the Use of It May Be Applied to Your Everyday Life

Autor:   •  May 23, 2012  •  Essay  •  705 Words (3 Pages)  •  1,080 Views

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Select either the balance sheet or income statement and explain how the use of it may be applied to your everyday life.

An income statement presents the company's revenues and expenses for a specific accounting period, be it a month, quarter, or year. It can also be called a statement of earnings or a statement of operations, the income statement compares a company's revenues with its expenses during a specific period. The difference between the two is a company's net income (or net loss). In short, the income statement allows a company to know whether or not they are profitable as a business. This can be useful in my everyday business life. This will allow me to tell if we can afford to remain open as a profitable business. The income statement provides information concerning return on investment, risk, financial flexibility, and operating capabilities. Return on investment is a measure of a firm's overall performance. Risk is the uncertainty associated with the future of the enterprise. Financial flexibility is the firm's ability to adapt to problems and opportunities. Operating capability relates to the firm's ability to maintain a given level of operations.

The current outline of the income statement is that the income statement should reflect all items of profit and loss recognized during the accounting period, except for a few items that would be entered directly under retained earnings on the balance sheet, notably prior period adjustments (i.e., correction of errors). The income statements measure revenues and expenses in terms of dollars, these figures do not necessarily correspond to specific amounts of cash a company has. For example, a company most likely does not have the amount of cash corresponding to its net income on an income statement. Instead, this figure represents both the

Financial Accounting

actual cash the company has received as well as promises from customers and clients to pay the company for products and services purchased on credit. Nevertheless, companies record revenues when they earn them and expenses when they incur them, not when they actually receive cash. This practice is referred to as the accrual basis of accounting.

Using the same concept selected above, discuss how a business manager may benefit from an understanding of this statement.

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