Application of Financial Statement Assignment Example | Topics and Well Written Essays - 750 words

Application of Financial Statement - Assignment Example Thus, in everyday life, the Income statement can be quickly and easily drawn up to show whether a person is generating positive income or a loss. If the person is incurring a loss, the income statement shows why this is so by providing a breakup of the expenses incurred. The individual can then know which expense is larger than the others and which expense can be easily controlled (Fridson & à lvarez, 2002). For instance, certain expenses such as house rent, fuel, heating and lighting of the house maybe unavoidable, but certain expenses such as food items may be controllable. The purpose of this statement in everyday life is to ensure better control over expenses and how to economize on these expenses in order to generate sufficient income. The concept of â€Å"sufficient† income again varies from individual to individual so there is no such concept of a perfect income or desirable income. However, the idea is to prevent individuals from going into a loss by allowing them be tter control over their expenses and inducing them to save rather than spend. In a business setting, the income statement simply draws a comparison between revenues and expenses, showing which is higher. The usefulness of an income statement for business managers is not limited to the numbers per se. Ratios calculated by using these numbers provide more useful information for decision making. The income statement, to this end, provides a quick assessment of the firm’s overall risk from operations, profitability and flexibility of its operations. For instance, the Return on Investment is calculated partially by using the income statement and partially by the balance sheet. The Gross and Net Income figure provided by Income Statement is used in a lot of other ratios, such as Gross Profit Margin, Net Profit Margin, Return on Assets, and Return on Equity etc. The Gross Profit Margin is simply found by dividing gross profit by sales, which indicates how much profit is earned per  dollar of sales, taking the cost of goods sold into account (Wild, 2006).