Accounting For Dummies®, 4th Edition

4.6. Closing Comments

The income statement occupies center stage; the bright spotlight is on this financial statement because it reports profit or loss for the period. But remember that a business reports three primary financial statements — the other two being the balance sheet and the statement of cash flows, which I discuss in the next two chapters. The three statements are like a three-ring circus. The income statement may draw the most attention, but you have to watch what's going on in all three places. As important as profit is to the financial success of a business, the income statement is not an island unto itself.

Also, keep in mind that financial statements are supplemented with footnotes and contain other commentary from the business's executives. If the financial statements have been audited, the CPA firm includes a short report stating whether the financial statements have been prepared in conformity with GAAP. Chapter 15 explains audits and the auditor's report.

I don't like closing this chapter on a sour note, but I must point out that an income statement you read and rely on — as a business manager, investor, or lender — may not be true and accurate. In most cases (I'll even say in the large majority of cases), businesses prepare their financial statements in good faith, and their profit accounting is honest. They may bend the rules a little, but basically their ...