There are two financial statements that are used in the financial analysis of a company - the income statement, the balance sheet, and the statement of cash flows. Each holds a specific use to the managers and shareholders of the company, and can influence the financial decisions when they (financial statements) are interrelated.
The income statement is important in that it shows the profitability of a company over a specific period of time. The income statement gives a breakdown of each expense, starting with the dollar amount of sales for the period, deducting such things as the cost of goods that were sold, selling and administrative expenses, taxes and interest, to get the earning that are available to the stockholders.
The income statement is important because it shows stockholders and investors if the company gained or lost money during the specific period of time, showing details as to where the increase or decrease may have occurred, and provides the company with the price-earnings ratio within its industry. There are limitations with the income statement, in that, it reports its gains and losses by transactions of a company, and not the valuation of the company during a set period. In Chapter Two of Foundations of Financial Management, the authors give the example of the value of land may increase or decrease based on surrounding businesses. The value cannot be measured on the income statement, but must still be considered for the future value of the company.
Another financial statement used is the balance sheet, which shows the assets and liabilities of the company ...