The income statement is also referred to as the profit and loss statement or revenue statement. It indicates how the revenue is transformed to net income. It does take into account all revenues identified in a specific period of account, the costs and the expenses (including write offs) charged against. Write offs include depreciation and amortization of several assets, and also taxes.
The purpose of an income statement is to inform investors and managers whether the company made profit or loss during the reported period. An income statement is always used for a period of time unlike the balance sheet which represents a certain moment in time.
There are several differences between managerial and financial accounting. Financial accounting reports are prepared for external use whereas the managerial accounting reports are made for managers in the organization. Bearing in mind that planning is a strategic bit of an organization’s success and an important part for managers’ work, managerial accounting has a strong backing in future orientation unlike financial accounting which practically summarizes financial transactions from the past.
Financial accounting data is expected to be verifiable and objective while managerial accounting information is only expected to be relevant even when not completely objective and verifiable. Managerial accounting emphasizes less on monitory data unlike financial accounting whose main emphasis is on monitory data.
Financial accounting is concerned with reporting for the companies as a whole in contrast to managerial accounting whose main concern is to report to segments of the company. Since financial accounting standards are for outsiders, they have to follow the generally Accepted Accounting Principles. Outsiders need to have some assurance that information given to them calls for obedience to the given rules. These common set of ground rules enhances fraud reduction, reduces misrepresentations and misinterpretations and hence enhances comparability.
Unlike managerial accounting which does not have to prepare its information based on Generally Accepted Accounting Standards, financial accounting calls for strict observation of these standards. Financial accounting information should always be prepared on periodic basis unlike the managerial one, which is used by insiders.
Financial information elicits several needs and uses for internal purposes. It is basically found in the balance sheet, a statement of cash flow, an income statement and some notes. The internal environment of an organization includes employees, managers, shareholders, among many others.
Employees are interested in information about profitability and stability of their employers. They may also be interested in assessing the organization’s ability to provide remuneration, employment opportunities and retirement benefits.
Management is also interested in financial information even though it can access additional management and financial information to help it carry out its planning, decision-making and other control responsibilities.
Managerial accounting profession has many roles in today’s business environment. It assists in future planning for the organization. Planning can be done at three levels; Strategic, tactical, and functional. Strategic planning involves setting long-term goals to be achieved by the organization. This involves the setting of a budget. Tactical planning involves coming up with ways of achieving and implementing strategic goals of an organization. Functional planning involves putting into action the ways that tactical managers have come up within order to achieve the strategic goals.
Managerial accounting profession due to its planning call is the core determinant of the direction in which an organization is heading. If good planning takes place, then it will lead to an organization succeeding but if bad planning is in place, then an organization will definitely face a downfall.
Since the structure of organizations keep on changing, it is necessary for managerial upgrades in such a way that unlike the past where the managers had to plan on paper, they should now embrace use of computers.
Certified Management Accountant is an individual that holds the Certified Management Accountant credentials. Subject matter of the designation includes corporate finance, operations management, internal control, financial accounting, statistics and economics, all these emphasizing on ethics.
There are several differences between the absorption and contribution income statements. Under absorption costing, increase in inventory leads to the exclusion of some of the fixed manufacturing incurred in the current period from then income statement. Instead, these costs are carried on to the balance sheet as part of the inventory account.
Under variable costing method, the entire fixed manufacturing overheads are included and are treated as expenses of the current period. This difference in ending inventory explains why net income cannot be the same in the two instances even if all the other values are similar.
The fact that both absorption costing and variable costing are not comprehensively accurate for decision making ,bearing in mind that most companies nowadays are producing more than one product, has forced companies to consider coming up with another method. This method of income statement preparation is the activity based costing. It identifies activities in the organization and assigns the cost of each with resources ( cost drives) to all products and services in the organization to actual consumption by each.
By using this method, it can be concluded that fixed costs will be fairly split thus advocating for a more accurate inventory valuation. This leads to more accurate decisions made.
Break-even analysis can be useful in many ways. It is used in the study of the relationship between revenue, fixed costs, and variable costs. The break-even point defines when an investment will start generating a positive return. Break- even price analysis produces a price at a given level of activity that will cater for all the costs incurred.