We have seen that the profit and loss account is anxious with revenues and costs and also the record highlights assets and liabilities.
However, the financial picture isn’t quite complete since we’ve not yet drawn attention to cash flows or the cash effects of the assorted transactions dispensed by the business. we’d like to be ready to answer such questions as, how has the business financed its cost (expenditure on fixed assets) and to what extent has it had to depend on bank borrowings and further contributions from shareholders? A income statement focuses on these matters by presenting information from both the record and also the profit and loss account during a different way.
The objective is to clarify how cash, bank balances and borrowings have changed during a selected period and to grasp the explanations why.
Three financial statements are needed to completely describe a company’s business activities: the profit and loss account, the income statement and therefore the record.
The profit and loss account answers the question ‘Is the business profitable?’
The income statement answers the question ‘To what extent has the business generated cash?’ The record answers the question ‘Is the business soundly financed?’
Earning a profit and generating cash aren’t synonymous seeable of the timing differences between recognizing revenues and receiving cash, and incurring costs and paying cash. Also, for perfectly valid reasons, the calculation of profit isn’t entirely straightforward since estimates, especially of costs, will must be made. Profit is, therefore, a matter of opinion, whereas cash could be a matter of fact. You either have it otherwise you don’t!