Income Statement

Income Statement:Reports a snapshot of a company’s business performance over a period of time. This statement indicates how much revenue (sales) is generated by a business, and also accounts for direct product costs, general expenses, Interest on Debt, Taxes, and other expense items. The purpose of this statement is to show the company’s level of profitability, which is equal to a company’s Revenue net of its expenses.Balance Sheet Statement:Reports a snapshot of a company’s outstanding balances in various accounts at a specific point in time. The purpose of this statement is to demonstrate a business’s financial heath at any given time, by enumerating it assets as well as the claims against them (liabilities and equity).Balance SheetThe Balance Sheet provides a snapshot of a company’s financial position at the end of a period (either quarterly or annually). The balance sheet lists company Assets, Liabilities, and Shareholders’ Equity as of a specific point in time. An important rule is that the Balance Sheet for a company must balance. In other words:BALANCE SHEET GOLDEN RULE: ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITYThis may seem like an obvious statement, but in producing financial models it is easy to make an error wherein the balance sheet does not properly balance, which will lead to serious problems with financial projection. Always make sure your balance sheet balances!As demonstrated above, the difference between Assets and Liabilities isShareholders’Equity. In other words, the value of a company’s equity is equal to the value of its assets net of the outstanding obligations it has to other entities. This is, from an accounting (or “book”) perspective, what the value of a company’s shareholders positions “should be.” As we have seen, there are many reasons why a company’s equity will trade at a different valuation in the market than that derived from the Balance Sheet (usually, and hopefully, at a higher valuation than Book Value).ImportanceIncome statements report operating results, such as sales and expenses, and so allow investors to evaluate the company’s performance and consider how future cash flows might look. Most investors start by looking at recent income statements when analyzing investment potential. Income statements show profitability on three levels: gross profit, operating profit, and net income, and how profit is being driven (by driving sales, or reducing expenses, for example).Balance sheets present important information about the financial strength of the company. They allow investors to calculate days of Working Capital, which shows how easily a company can handle changesin revenue while staying afloat. Companies should have at least 30 days of Working Capital, and financially strong companies have more than 180 days. Balance sheets can also identify other trends, such as how the receivables cycle works, how net profits are being used, and how often equipment is replaced.RelationshipAccounting is a “double-entry” system; i.e., every accounting entry has two sides to it, a debit and a credit. For example, a sale recorded on an income statement will increase an asset (such as cash or accounts receivables) on the balance sheet, and an expense decreases an asset (e.g. cash) or increase a liability (e.g. debt). Sales revenue on an income statement will affect cash and accounts receivable, while cost of goods sold will affect inventory and accounts payable. An income statement for a specific time period can be used to "connect the dots" between the balance sheet at the beginning and end of the period. This video explains how:explain with suitable examples or illustrations the following accounting terms Capital and Revenue expendturedifference between capital and revenue expenditure where a capital expenditure results in an addition to an asset account whereas a revenue expenditure results in an addition to an expense account. Capital expenditures are payments for asset alterations, additions and replacements where revenue expenditures benefit a current period and are made for maintaining assets with routine repairs or replacment of a minor part. A capital expenditure will benefit two or more acounting periods through depreciation process and expenses for future accounting periods. A capital expenditure recorded as a revenue expenditure will cause an understatement of net income in that year. When expensing an item, it goes into the expense side of the income statement whereas capitilizing an item will be processed on the balance sheet.。