by Anthony Williams | on May 30, 2013
The Balance Sheet and Income Statement
In this blog entry I discuss the purpose of a balance sheet and an income statement in terms of functionality, accuracy, and importance. Also I explain how these statements are used by investors, lenders, and corporate managers when making decisions. These financial statements are important tools one can use to gain an understanding of an organization’s financial health. The balance sheet and income statement is used by different stakeholders to assist them in making informed decisions.Purpose of the Balance Sheet
The balance sheet is used to give a snap shot of an organization’s assets, liabilities, and its equity at a given point in time, and is summarized in an organized way. However, the book values on an accounting balance sheet may be very different than that of market values. This is important to know, because, financial management’s goal is to maximize market value only (Ross, Westerfield & Jordan, 2011).How the Income Statement Differs from the Balance Sheet
By contrast, the income statement quantifies performance within some period of time, which could be three months to a year. For instance, a balance sheet may show the details of point A or B. But, the income statement would cover the history from point A through point B. Still, one must remember that it is the marginal tax rate that is significant in financial decisions (Ross, Westerfield & Jordan).In addition the balance sheet and income statement are collectively important to lenders, investors, and corporate managers. As stated above lenders, investors, and corporate managers used these statements to assess the financial position of an organization. For example, market value relative to the balance sheet and cash flow identity relative to income statements (Ross, Westerfield & Jordan).
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