Income statements can be challenging to analyze because they are often misunderstood or misread. These financial statements are important to prepare and very valuable when done right. However, when looking at them, you must understand the differences between cash flow and your overall income.
The Purpose of an Income Statement
An income statement is designed to show the overall position of a company by comparing revenue earned against expenses charged. The goal is to provide a net balance of all the income achieved after expenses have been subtracted from the revenues.
The important thing to remember is that the income statement does not equate to how much cash you will have in the bank. That’s because income statements reported on an accrual basis will count all revenue as income, even if it has not been paid yet. Your accounts receivable may not be the same as the revenue counted on the statement. So, your income statement may show you in the black while you might actually be in the red while waiting for certain revenue to be collected.
Reviewing All Financial Statements
When you understand intricacies like these, you can better analyze your income statements and get a sense of the health of your company regardless of actual cash flow. It’s always a good idea to look at the income statement and cash flow statement together in order to get a true measure of your company’s current financial position.
The Benefits of a Tax Professional
Unless you know exactly what you are looking for, it can be confusing and overwhelming to look at these financial statements. The income statement is very important to analyze in relation to your business tax liabilities, which is why it’s worth consulting with a tax professional. A seasoned tax expert or licensed CPA will be able to analyze your income statement to determine the true financial health of your business, helping you get a more accurate tax preparation with maximum expense deductions.
The tax professionals at Ferguson, Timar & Company are here to help with all your business tax needs. Our team of expert CPAs will review your income statements and other important financial statements along with your tax records. Contact Ferguson, Timar & Company today to schedule a business tax consultation and income statement review.