Explain why a business prepares an Income statement and a Balance Sheet at its financial year end.?

Question

Explain why a business prepares an Income statement and a Balance Sheet at its financial year end.?

Answer 1

To let the company know where it stands economically.  An income statement is just that - a statement of it's yearly income.  Is it increasing or declining or staying the same?  Are there more sources or less?  etc etc.

A Balance Sheet is more important, especially to investors because it gives a wider view of the company.  What are the expenses?  How much are they? Are they increasing or decreasing?  What is the debt?  Other sources of income and expense, etc etc.  Profits?

An investor who knows how to read on of these things (They can be long, tedious and complicated) is supposed to be able to get a good overall picture of the company.  However, with "new accounting" many companies have found ways to glamorize their Balance sheets by shifting expenses around, hiding some etc etc.

Answer 2

althgough these documments consist of a fair amount of opinion they show clearely to those who interpret them how well or badly a company has performed during the year.

It is also a legal requirement

Most even quite small  companies prepare an Income and Expenditure Sheet or if you want a Profit and Loss Account at monthly intervals to give an indication of any problems which might be developing or a trend which can be exploited.

They are also compared with  bugets for a year and theis will show how near target they are and if they are doing better or wowwrse than expected

Answer 3

To balance things out and make sure the accounts payable and receivables are up to date and correct. This avoids theft within a company and keeps track of money that they owe, and also what people owe them. It also shows how much revenue "profit" they made for the year or year end. Theres a lot more to it but thats the basic's.