How Income Statement Help In Decision Making

The income statement also called a profit and loss statement is one of the major financial statements issued by businesses along with the balance sheet and cash flow statement.

How income statement help in decision making. While the company can look profitable based on standard accounting methods the cash flow statement tells managers whether the company has the cash to pay its bills over the short term. Many business owners find it easier to make business decisions and compare their income statement trends using percentages rather than the actual numbers. In this lesson see how companies can use the cash flow statement for decision making and then look at an example of this document in action. To prepare a cash flow statement it is essential to have information on the company s income and disbursements.

The following income statement shows a company s percentage breakdown for one month. The income statement and the balance sheet can be viewed as a descriptive model for decision making. The cash flow statement is one of the most important documents for making management decisions. Income statementcompany xmay 2011 month.

Forecast specific line items and use these to calculate subtotals. Management can be deemed successful when the desired income has been attained and financial position is considered sound. Basically it is a decision making tool that helps businesses cope with the impact of the future s uncertainty by examining historical data and trends. Income statements show how much profit a business generated during a specific reporting period and the amount of expenses incurred while earning revenue.

Calculating these percentages is easy you simply divide each line item by net sales. For all the line items within the income statement. Although 100 000 units are produced during year 2 only 80 000 are sold during the year. How it s used in decision making simply put cash can.

The income statement offers effective tools to management for making decisions as to how revenues may be generated more and expenses may be reduced or controlled. Financial statements reflect success or lack of success in making decisions. The income statement also known as profit and loss statement p l reflects the company s revenue and expenses during a particular period of time. The cash flow statement.

Effective decision making process entails drawing financial information from income statement. This information can be found in the company s accounting records and it is important to order them in such a way to be able to determine the balance for the period generally one month and to estimate future cash flows. Prepare a contribution margin income statement assuming the company uses variable costing. The purpose of an income statement is to show how the company has performed by listing sales and expenses and the resulting profit or loss.