An article by Scott and John Bajkowski, (2010) studies financial statement, and it’s important in industries. The income statement reports the earning per share of a company and the stock’s value depends on the external potential of an industry (Scott and John Bajkowski, 2010). For this reason, most of the investors have to monitor the market variations before making a transaction because a small change in their prices has a significant role in the income of the company. The income statement determines the revenue earned in a given period and then matches it with the expenses.
Income statement has three parts which are very important and they include gross profit operating expenses and the net earnings. Gross profit shows the revenues which are the sales minus the cost of the goods (Scott & John Bajkowski, 2010). Other expenses are not included, and it helps in determining whether the products are highly discounted when compared to the previous years. Operating expenses show the cost of doing business which includes benefits, salaries, utilities, rent, advertising and other operating costs the expenses should be lower than the gross profit for the business to be viable (Scott & John Bajkowski, 2010). The net earnings show the profit or loss incurred in the business.
There are various rules and principles which determine the reporting procedures of the financial statements. According to McEwen, (2009), the rules contained in the International Financial Reporting Standards (IFRS) and generally accepted accounting principles (GAAP) are used to standardize financial reports. One of the differences is that IFRS is more principles based and therefore capturing the economics of a transaction while the GAAP is rules based. This can be demonstrated by considering intangible assets since in IFRS acquiring intangible assets is recognized if the asset has an economic importance and is measurable reliable in future while GAAP recognizes them at fair value (Robinson, 2009). In inventory costs IFRS also the Last-in, first-out accounting method for companies inventory costs is not allowed, but GAAP accepts the use of either Last-in, first-out or First-in, first-out inventory estimates (Ittelson, 2009). There is also a difference in write-downs since in IFRS they can be reversed in future provided specific steps are followed while in GAAP any reversal of the write-downs in future is prohibited.
Ittelson, T. R. (2009). Financial statements: A step-by-step guide to understanding and creating financial reports. Franklin Lakes, NJ: Career Press.
McEwen, R. A. (2009). Transparency in financial reporting: A concise comparison of IFRS and US GAAP. Petersfield, Hampshire: Harriman House.
Robinson, T. R. (2009). International financial statement analysis. Hoboken, NJ: John Wiley & Sons.
Scott, M. C., & Bajkowski, J. (2010). Stock market winners: What works and why. Chicago, IL: American Association of Individual Investor.