Explain the purpose of the income statement and the statement of cash flows.
Definition Definition Net amount of cash that an entity receives and expends over the course of a given period. For a business to continue operating, positive cash flows are required, and they are also necessary to produce value for investors. Investors in particular prefer to see growing cash flows even after capital expenditures have been paid for (which is known as free cash flow).
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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