Chapter 21 - Income Statements
Lesson Objective: To understand the different uses of an Income Statement
The Income Statement is a financial report that records the business' revenue, costs, and profits. It is usually released once a year for the analysis of internal and external stakeholders:
Income Statement vs. Cash Flow Forecast
The purpose of the Income Statement is to show how much profit a business made at a period of time;
On the other hand, Cash Flow Forecasts have the purpose of projecting how much cash the business will generate (inflows) and spend (outflows).
Which one should you use?
It depends on what you want to analyze:
Income Statements are good statements for analyzing profitability and therefore are used for profit/loss decisions;
Cash Flow Forecasts are focused on providing information on liquidity and solvency of the business and therefore are used for financing decisions.
Different stakeholders' groups look at the Income Statement from different perspectives and interests:
Owners/Shareholders: interested on the profitability of the business for assessing the return on their investments (e.g. dividends). Profitability also impacts the share value of the business.
Employees: concerned about job security, pay raises, bonuses - all of which are
dependent on the business profitability;
Lenders: whether or not the business is able to meet its debt obligations;
Governments: tax income and needed incentives (or lack of);
Suppliers: profitable businesses could mean more orders for the suppliers;
Managers: are assessed over profitability (performance) - retained profits are the source for further investment (or not).
Activity 21.3 (p. 270)
Activity 21.4 (p. 273)
Case Study - Uchumi (p. 274)
To-Do-List:
Exam Practice Questions (p. 275/276)
Chapter 21 - Income Statements
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