Income Statement: What Does Income Mean?

Part A :

A-1

Income Statement:

*What Does Income Mean?

Economic wealth that is generated in exchange for an individual's performance of agreed upon activities or through investing capital. Income is consumed to fuel day-to-day expenditures. For the average individual, income is earned through earning wages by working and/or making investments into financial assets. In most countries, the amount of income that an individual receives is taxed by the government before it is received. The revenue generated by income taxes is used to finance government actions and programs as determined by the federal budget.

The income statement is one of the three financial statements - the other two are the balance sheet and cash flow statement - with which stock investors need to become familiar. The purpose of this statement is to provide the less-experienced investor with an understanding of the components of the income statement in order to simplify investment analysis and make it easier to apply it to your own investment decisions. In the context of corporate financial reporting, the income statement summarizes a company's revenues (sales) and expenses quarterly and annually for its fiscal year. The final net figure, as well as various others in this statement, are of major interest to the investment community. The important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time.

Income statements should help investors and creditors determine the past financial performance of the enterprise, predict future performance, and assess the capability of generating future cash flows through report of the income and expenses.

However, information of an income statement has several limitations:

-Items that might be relevant but cannot be reliably measured are not reported

-Some numbers depend on accounting methods used

-Some numbers depend on judgments and estimates