Wiley GAAP 2008

Perspective and Issues

A primary focus of financial reporting is to provide information about an entity's performance that is useful to present and potential investors, creditors, and others when they are making financial decisions. In financial reporting, performance is primarily measured by net income and its components, which are provided in the income statement. Although information in the income statement is information about past performance, investors, creditors, and others use that information to predict future performance.

In contrast to the balance sheet, which provides information about an entity at a point in time, an income statement provides information about a period of time. It reflects information about the transactions and other events occurring within the period. Most of the weaknesses of an income statement are a result of its periodic nature. Entities are continually creating and selling goods and services, and at any single point in time some of those processes will be incomplete. Thus, measurement of net income for a period involves estimates. The degree of completion of inventories, the amounts of inventories that have been manufactured or purchased but ultimately will not be sold, and the amounts of goods and services that have been sold but ultimately will not result in cash receipts are just of few of the many estimates that must be made in order to present an income statement. The entity's ability (or inability) to make these estimates is reflected in ...