The main reason why an investor would pay attention to the balance sheet is the presence of detailed information on liabilities and assets. The significance of all the resources that an organization either owns or owes could become decisive in the long run, protecting the team from unexpected losses or additional expenditures (Ross, Westerfield, & Jordan, 2013). Therefore, a balance sheet is required because it provides information on the effectiveness of debt management and revenue generation. The data acquired via the balance sheet is then translated into other forms of financial reporting.
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An income statement is one of such forms, as it dwells on an organization’s economic health and outlines the perceived profitability of it. The administration should remain vigilant when assessing expenses and revenues in order to keep all the available and potential resources under strict control (Weygandt, Kimmel, & Kieso, 2018). Therefore, the management’s performance could be seen as dependent on the operating section and eventually incurring losses. In a sense, an income statement gives the business an opportunity to take a closer look at the least successful areas of their market activities.
It is essential for the investors to assess both balance sheets and income statements in order to see a fuller picture of what occurs within the company and decide whether an investment represents a viable option in any given case. The majority of future prospects cannot be evaluated in a rational manner when an investor does not have access to all the required information. Despite the differences, income statements and balance sheets might contribute to a good indication of the financial health of a company (Weygandt et al., 2018). Over time, the ability to assess different sources of information might help an investor unlock the best opportunities and avoid crucial pitfalls.
Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2013). Fundamentals of corporate finance (11th ed.). New York, NY: McGraw Hill.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial accounting with international financial reporting standards. Hoboken, NJ: John Wiley & Sons.