The income statement reveals the potential of the business to make a profit with higher accuracy especially when the accrual basis of accounting is used. However, this statement does not give information on the amount of assets as well as liabilities that are required to do so. Additionally, the cash flow generated by the business does not always equate to what the results of the statement indicate. Therefore, the income statement might be misleading if entirely depended upon alone.
The statement is less informative on its own since it does not disclose operation results and may present results based upon historical costs. It, however, becomes a powerful tool when merged with the income statement as it shows the amount of capital required to support the sales as well as profits revealed by the income statement. The Statement of cash flows, on the other hand, mainly concentrates on the cash flow changes (inflows and outflows) of a company. It provides a concise picture of the business’s cash flow, much far more precise than the income statement, which can a time give skewed results.
The statement of retained earnings statement presents the net profit of a company after paying all the dividends. As an investor, this is the most critical statement and thus needs more emphasis among the four. When companies are rapidly growing and expanding, they usually direct all the income into the retained earnings, bypassing the dividend payment and, as an investor, the rising share prices due to this development will be of benefit to me. I will focus more on this type of statements because I will anticipate being rewarded from dividends and or from stock share price increase as a stock owner in a given company. I will, therefore, focus my attention on the retained earnings statements to, first of all, predict the future performance of the company in terms of dividends and secondly as one of the essential aspects to put into consideration when predicting the probability of share price growth in the future.