1.- What are the differences between Income Statement and Balance sheet and how to interpret them?
The three most important, and most common, financial statements for any business are:
- Balance sheet: Shows what a business’s financial position is at a moment in time.
- Profit and loss, or income statement: Shows financial performance in a particular period of time.
- Cash flow statement: Records money coming and going for a particular period of time — like your bank statement, but with insights into patterns and/or problems.
There are several differences between the balance sheet and income statement, which are outlined in the following points:
- Timing. The balance sheet reveals the status of an organization’s financial situation as of a specific point in time, while an income statement reveals the results of the firm for a period of time. For example, financial statements issued for the month of December will contain a balance sheet as of December 31 and an income statement for the month of December.
- Items reported. The balance sheet reports assets, liabilities, and equity, while the income statement reports revenues and expenses that net to a profit or loss.
- Metrics. The different line items in the balance sheet are compared to each other to derive the liquidity of a business, while the subtotals in the income statement are compared to sales to determine the gross margin percentage, operating income percentage, and net income percentage.
- Uses – management. The balance sheet is used by management to determine whether a business has sufficient liquidity to meet its obligations, while the income statement is used to examine results, and find any operational or finance issues that are in need of correction.
- Uses – creditors and lenders. Creditors and lenders use the balance sheet to see if a business is over-leveraged, which tells them if they should extend additional credit to the entity. They use the income statement to decide whether a business is generating a sufficient profit to pay off its liabilities.
- Relative importance. The importance of the two reports varies by reader, but the general view is that the balance sheet is second in importance to the income statement, because the income statement reports the results of the enterprise.
2.- How does income statement and balance sheet can determine how profitable your business is?
An income statement, also known as a profit and loss statement, shows how profitable your business was over the course of a specific accounting period. Think of it this way. The balance sheet tells you what your business’s assets and liabilities are, while the income statement tells you how your business used them.
The P&L statement is one of three financial statements every public company issues quarterly and annually, along with the balance sheet and the cash-flow statement. The income statement, like the cash flow statement, shows changes in accounts over a set period. The balance sheet, on the other hand, is a snapshot, showing what the company owns and owes at a single moment. It is important to compare the income statement with the cash flow statement since under the accrual method of accounting, a company can log revenues and expenses before cash changes hands.
The income statement follows a general form as seen in the example below. It begins with an entry for revenue, known as the top line, and subtracts the costs of doing business, including the cost of goods sold, operating expenses, tax expense and interest expense. The difference, known as the bottom line, is net income, also referred to as profit or earnings. You can find many templates for creating a personal or business P&L statement online for free.
It is important to compare income statements from different accounting periods, as the changes in revenues, operating costs, research and development spending and net earnings over time are more meaningful than the numbers themselves. For example, a company’s revenues may grow, but its expenses might grow at a faster rate.
Read more: Profit and Loss Statement (P&L) https://www.investopedia.com/terms/p/plstatement.asp#ixzz5ShvWwUM2
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3.- Does Income Statement and Balance Sheet give you enough information to know if a company is sustainable on the long term?
financial reports are frankly not the best tools for making internal business decisions. However, they can serve as the “bedrock” for other reports (such as management reports) that CAN and SHOULD be used to make decisions.
As such, it’s crucial that financial reports are as accurate as possible, because otherwise any management reports (and ensuing decisions) based off them will be based on a shaky foundation. This is where companies can run into trouble using legacy methods of doing financial reports (such as using one massive spreadsheet that multiple users have access to) and where they could see benefits from using financial dashboards instead.
The Importance Of Financial Reporting And Analysis: Your Essential Guide
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