Explain the purpose of the income statement and thestatement of cash flows.

Principles of Accounting Volume 1
19th Edition
ISBN:9781947172685
Author:OpenStax
Publisher:OpenStax
Chapter2: Introduction To Financial Statements
Section: Chapter Questions
Problem 12Q: Explain the purpose of the statement of cash flows and why this statement is needed.
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Explain the purpose of the income statement and the
statement of cash flows.

Expert Solution
Step 1

Financial statements:

Financial statements are condensed summary of transactions communicated in the form of reports for the purpose of decision making.

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Statement of cash flows: Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

Step 2

Purposes of the income statement

  • Calculate the profitability and helps to assess the return on investment of the company.
  • Evaluate the operating ability and financial performance of the company for the current period.
  • Helps to assess the performance of the management.
  • Helps to predict the future cash flows and the net income of the company.
  • Helps to compare the financial performance of one company with other companies.
  • Helps to evaluate the influence of the economic factors on the company.
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