Question

You have learned four financial statements in Accounting. In your opinion, which one is the most important statement? Please discuss this question.

Make your initial statement by replying to this post,

Answer 1

Income statement

The most important financial statement for the majority of users is likely to be the income statement, since it reveals the ability of a business to generate a profit. Also, the information listed on the income statement is mostly in relatively current dollars, and so represents a reasonable degree of accuracy. However, it does not reveal the amount of assets and liabilities required to generate a profit, and its results do not necessarily equate to the cash flows generated by the business. Also, the accuracy of this document can be suspect when the cash basis of accounting is used. Thus, the income statement, when used by itself, can be somewhat misleading.

It summarizes the operating results of the business by matching the revenue earned and expenses incurred to earn that revenue during a particular period of time. The revenue and expense figures used for the preparation of income statement are directly taken from the adjusted trial balance. If revenue exceeds the total expenses, the income statement shows a net income for the period but if, on the other hand, the total expenses exceed the revenue, it would show a net loss. The net income (or net loss) determined by the income statement is reported in the statement of retained earnings. It is, therefore, prepared first of all other financial statements.