Income statement represents a key financial report. It is also called profit and loss account. All expenses and losses are shown on the debit side while all incomes and gains are shown on the credit side of the income statement. Income statement shows profitability of a concern over a period of time.

It is a must for every business to prepare and maintain an income statement as it helps in judging the financial soundness of a concern. Income statement is of prime importance to various external parties like investors, creditors, government authorities and so on.

Let Us Discuss Some Advantages And Disadvantages Of An Income Statement:

Advantages:

a) Information:

Income statement provides important information as to total sales revenue, major expenditure heads and income from other sources. For Instance, it contains information on purchases, expenses like salary, wages, rent, interest expense, taxes, depreciation, office expenses etc., and income from other sources like bank interest, interest on investments etc. Shareholders also prefer to study the information contained in the income statement as they are entitled to dividend income out of the final profit disclosed in the income statement.

b) Ratios:

Information available in income statement is often used for calculation of various ratios. These ratios are used by industry experts and analysts to comment on company’s performance which in many cases becomes the basis for investment in a particular company.

c) Comparison:

Income statement can also be used for making comparisons over a period of time. Comparisons can be made for multiple years or with industry peers and so on. Such a comparison can highlight areas where a company has performed better as well areas where a company has not performed as per the expectations. Even at the time of approving a loan, a bank generally asks for income statements (along with other financial statements) for at least a period of three to five years.

Disadvantages:

a) No Information As To Actual Cash Status:

A major disadvantage of an income statement is that even though it provides information on the profitability of a company, it does not clarify the actual cash position of the organization. For Instance, sales shown on the credit side of income statement may include both cash and credit sales. At the end of the relevant period, there is a possibility that some of the credit sales have still not been collected.

Hence, income statement may show higher profitability on account of credit sales while its actual cash position may show deterioration. Hence, income statement works best when it is used in conjunction with other financial statements like balance sheet, cash flow statement and so on.

b) Subject To Manipulation:

Income statement has to be prepared in line with various accounting policies and principles. However, it is often seen that income statements are manipulated to show better turnover and profitability or to show more expenses in order to reduce the tax liability. Moreover, management may not follow sound business practices while preparing income statement.

This can result in misrepresentation of key financial information. Also it may create a false impression in mind of various stakeholders which may influence their decisions in relation to a particular company.

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