Running head: THE INFLUENCE OF INCOME STATEMENT TOWARDS BUSINESS OWNERS 1

The Influence of Income Statement towards Business Owners and

It’s Impact on their Decisions

CP Jay T. Constantino

Divine Grace G. Gapasangra

University of San Agustin

Authors Note

CP Jay T. Constantino and Divine Grace G. Gapasangra are first year students taking up

Bachelor of Science in Accountancy at University of San Agustin, Gen. Luna St. Iloilo

City.

This research paper is an output as their partial fulfillment for their course Purposive

Communication (GE5).

Correspondence concerning this research paper should be emailed to

imcjayconstantino19@gmail.com and/or divinegray62@gmail.com

THE INFLUENCE OF INCOME STATEMENT TOWARDS BUSINESS OWNERS 2

Abstract

This paper describes the influence effect of income statement and its impact to the

business owners in making business decisions. It explores related articles pertaining to the topic.

Richard (2018) made a stand that income statement highly influenced the decisions of business

owners because it can reflect strength and weaknesses which can be a lead factor for future

decisions. According to Bakliwal (2016), there are 5 roles of financial statements in business

decision making. He also concluded in the article that business decisions when based on

financial data become the most important parameter which should also be accurate and relevant.

The conclusions and discussions of this research paper were stated accordingly and is relevant

for the accounting students, accounting teachers, accountants, business owners, and future

researchers.

keywords: income statement, business owners, financial statements

THE INFLUENCE OF INCOME STATEMENT TOWARDS BUSINESS OWNERS 3

The Influence of Income Statement towards Business Owners and

It’s impact on their Decisions

According to Corporate Finance Institute (2018) the income statement is one of a

company’s core financial statements that show their profit and loss over a period of time. The

profit or loss is determined by taking all revenues and subtracting all expenses from both

operating and non-operating activities.

Richards (2018) states that financial statements are used to provide shareholders,

partners, or potential investors with key business metrics It’s also a powerful diagnostic tool

business owners can use to evaluate their firm’s strengths and weaknesses, which can help you

chart the way forward based on doing more of what works for the greatest impact on your

bottom line. Income statements highly influence business owners’ decisions.

Literature Review

As a business owner, financial data is critical to your success but only if you know how

to interpret the meaning behind the numbers correctly. Most business owners rely on the aid of

an accounting team to accurately analyze and organize financial data, but it’s up to you to make

smart decisions based on the information they’ve gathered (Kruger, 2018).

There are three major financial statements your accounting team will present to you on a

regular basis: income statements, balance sheets, and statements of cash flow. One of the

financial statements is the income statement also called a profit and loss statement or P&L

statement that measures the profitability of your business during a specified accounting period.

This statement assesses all of your business’ revenue and expenses, and then reports a net profit
THE INFLUENCE OF INCOME STATEMENT TOWARDS BUSINESS OWNERS 4

or net loss. Harold Averkamp (2004) states that revenues are the amounts that a business earns

from selling goods or providing services to its customers and an expense is a cost that occurs as

part of a company's operating activities during a specified accounting period. All companies

need to generate revenue to stay in business. Revenues are used to pay expenses, interest

payments on debt and taxes owed to the government.

According to Bakliwal (2016), there are 5 roles of financial statements in business

decision making; 1) Formulate Plans & Policies, 2) Holding Of Share, 3) Expansion Of

Credit, 4) Investment Decision 5) Taxation Decisions.

Formulate Plans and Policies

The management of the company is time and again required to take several decisions

with regards to formulating plans and policies for the future. Hence to take such decision they

need to evaluate the past performance of the company. Financial statements in such cases

provide the decision makers with a clear picture of the required period of time, helping them take

necessary decisions regarding the plan and policies.

Holding of share

Shareholders being the owners of the company need to time and again

take decision whether they want to continue with the holdings of the company's share or sell

them out. The annual financial statement provides the shareholders with meaningful information

to take such decisions.

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Expansion of Credit

The creditors or the lenders are the providers of loan capital to the company. They use the

entire set of information provided in the financial statements to determine whether they should or

restrict the extent of credit to a business. They also decided the interest rates of the loans give to

the company based on the financial statements.

Investment Decision

Prospective investors who have surplus capital to invest in profitable opportunities look

for financial information of the company they are looking to invest in. To decide whether or not

to invest their capital in the company's share, the financial statement play an important role in

providing useful information for their investment decision making purpose.

Taxation Decisions

Financial statements help the decision makes to make taxation decisions. By giving vital

information based on the assets or income, the decision makers can derive the information from

the financials. They can take decision to save taxes based on these financial statements.

Bakliwal (2016) concluded in the article that Business decisions when based on financial

data become the most important parameter which should also be accurate and relevant.

On the other hand, Dennis (n.d.) argued that financial statements are subject to various

forms of manipulation - some of it allowable and some of it improper and possibly illegal. He

states that some credit managers rely too heavily on financial statement analysis without

understanding its limitations. If the recent accounting scandals have demonstrated anything, it is
THE INFLUENCE OF INCOME STATEMENT TOWARDS BUSINESS OWNERS 6

that financial statements are subject to various forms of manipulation - some of it allowable and

some of it improper and possibly illegal. A customer's past financial performance - good or bad -

is not a perfect indicator of future performance. The more out-of-date financial statements are,

the less valuable they become to the credit department. In some instances, unaudited financial

statements are worse than nothing - because they can be entirely fictitious and intended to be

used to defraud creditors. More broadly, it is impossible to know how accurate unaudited

financial statements are. For this reason, it is imprudent to rely too heavily on them when

evaluating credit risk. Unless a customer or applicant provides a prior period financial statement

for comparison, there is no starting point from which to determine whether or not the risk of

offering open account terms to the company under review is getting larger or smaller. Most

creditors do not receive copies of notes to the financial statements except from publicly traded

companies but without these notes it is impossible to get a clear picture of the company's

financial health.

However, the financial statements play a number of different roles. And each and every

role depends largely upon who is reading the information and which financial statements are

being examined. Hence the role of financial statements in business decision making is vital

(Bakliwal, 2016)

Each decision you make at your business might address a specific problem or need in a

department, but all decisions can affect the main goal of any company; profitability. When

managers make decisions in a vacuum, it can lead to interdepartmental complications.

Understanding the basic factors you should consider when making any decision helps you and

your staff make better plans or react to individual situations.

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Return on Investment

One of the obvious factors that influences business decisions is the effect on profitability.

You can measure this in a number of ways, but calculating a return on investment is often the

simplest. The return on an investment is the amount of benefit you gain or lose by undertaking an

activity. For example, if you spend $1,000 on a magazine ad, you might generate $5,000 in sales.

If you spent that $1,000 on direct mail, you might generate $6,000 in sales. However, the staff

time you spend managing the direct mail program might cost you much more than placing an ad,

making your return on the ad better. Calculating your return for each opportunity would let you

know what options offer a better investment.

Brand Impact

Many decisions you make, from where you advertise and sell to what prices you charge

and charities you sponsor, have an impact on your image. Just because you can increase sales

temporarily with a 50 percent off sale doesn’t mean you should do it if the sale sends the

message that you can’t sell your product at full price. It might be better to donate that inventory

and take a business write-off, even if you end up with less financial benefit from the donation,

because you’ll protect your brand. Adding a new product to your line that doesn’t fit in with your

other products can send a message to consumers that you no longer specialize or are an expert in

what you sell, damaging your brand. Consider what your customers will think when you make

decisions the public can see.

Effect on Resources

When you calculate your profit benefit from a possible decision, also consider the overall

effect on your sales, human resources, accounting, production and information technology staff.

If making a particular product takes your staff away from other activities, you might lose other
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profit opportunities. If you overburden your staff, you might start losing key employees. In

addition to looking at your dollar costs for making and selling a product, review the impact it

will have on your operations.

Opportunity Cost

When you make one choice, you lose the opportunity to make another. For example, if

you decide to buy radio ads, you might not have the budget to buy TV spots. If you buy new

machinery that improves your production, you might not be able to give raises or bonuses this

year. Asking your sales staff to develop new customers might result in them providing less

customer service to existing customers. When you make important business decisions, ask

yourself what would happen with your money and resources if you don’t pursue that plan or

project.

All financial statements are based on historic financial data. Therefore, it is important to

understand that any decision made will be based off trends that may never occur in the future.

Henceforth, anyone making a decision with the use of financial statements should be aware it is

merely guide and business happens in real-time and other economic conditions could cause

businesses to miss their mark. A company’s goals, sales or earnings forecasts, and measuring

business performance are all things that can be determined with information from financial

statements along with an understanding of best business practices and market trends.
THE INFLUENCE OF INCOME STATEMENT TOWARDS BUSINESS OWNERS 9

Discussion

The income statement also called a profit and loss statement or P&L statement that

measures the profitability of your business during a specified accounting period. This statement

assesses all of your business’ revenue and expenses, and then reports a net profit or net loss.

Financial statements in such cases provide the decision makers with a clear picture of the

required period of time, helping them take necessary decisions regarding the plan and policies.

They also decided the interest rates of the loans give to the company based on the financial

statements. By giving vital information based on the assets or income, the decision makers can

derive the information from the financials. They can take decision to save taxes based on these

financial statements. The researchers after gathering all the related literature and data conclude

that income statement highly influence the decisions of business owners.

Limitations of the Study

The study primarily focuses only to income statement alone affecting the business

owner’s decisions.

Financial Statements. It is composed of Balance Sheet, Income Statement and Cash

Flow, but the study mainly focuses only in the Income Statement. Income Statement according to

Dennis (n.d) is not one hundred percent accurate because it is susceptible to changes,

adjustments, and manipulations. Using income statement without other financial statements as a

basis for making economic decisions is a risk. ALTWPAdmin (2016) added that a decision

should never be based on information found on one lone financial statement, because one

financial report will not provide the complete information needed to make the best decision
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10

possible. It would not provide the decision-maker a view of the entire financial condition of its

business.

Other factors. Each decision you make at your business might address a specific

problem or need in a department, but all decisions can affect the main goal of any company –

profitability. Edmunds (2018) listed the following factors (Return on investment, Brand impact,

Effect on resource, Opportunity cost) that may influence business owner’s decisions. The return

on an investment is the amount of benefit you gain or lose by undertaking an activity.

Calculating your return for each opportunity would let you know what options offer a better

investment. Many decisions you make, from where you advertise and sell to what prices you

charge and charities you sponsor have an impact on your brand image. When you calculate your

profit benefit from a possible decision, also consider the overall effect on your sales, human

resources, accounting, production and information technology staff. If making a particular

product takes your staff away from other activities, you might lose other profit opportunities.

When you make one choice, you lose the opportunity to make another.
THE INFLUENCE OF INCOME STATEMENT TOWARDS BUSINESS OWNERS
11

Conclusions and Future Study

After the researchers have gathered data, they made conclusions that in the business

world, the decisions of the business owners rely on the income statement prepared by a

company’s official accountant for it is one of the bases for the future economic decisions. The

statement of Comprehensive Income or simply called the Income Statement unveils the

company’s expenditure and revenues; hence profit is solved and shown.

Income statements play a vital role affecting the business owner’s business decision. The income

statement must be prepared accordingly because accurate information will lead to good interpretation. A

business owner must deliberately examine the information presented in the income statement. Without

income statement, there is no basis for which there is really profit or losses. In order to influence the

business owners in making good future decisions for their business, it is necessary to conduct a study that

pinpointed the significance of the income statement which is a big contributing factor to determine

business’ financial performance. A business that evaluates the status of their economic entity is a business

that is good in making business economic decisions.

The aims of this study are to interpret the phenomena on how does the Income statement

influences the economic decisions of the business owners. Subsequent to this, the impact to the

business owners was evaluated by the different perspectives and related studies. The

explanations focus pertaining to the impacts of the income statement to the business owners

stated in the literature review are evaluated. Shareholders need time to make decisions in the

future thus they have to evaluate the past performance of the business. Creditor’s confidence to

invest will also be based in the business’ profit or losses. Income Statement will also be a lead

factor to determine tax computations and in accordance to this, the business owners can

contemplate decisions to save taxes.

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12

Recommendations

Based on the findings and conclusions, the following recommendations are presented by

the researchers:

1. To the Accounting Students, to be aware of that business decisions are formulated

through precise and accurate income statements.

2. To the Business Owners, the results of this study will broaden their knowledge and

understanding about the influence of income statement towards business owners.

3. To the Accountants, to be aware of the fair presentation of income statements as a

basis of business owner’s decisions..

4. To the Future Researchers, to conduct further research studies associated to Financial

Statements.
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References

Bakliwal, N. (2016, October 16). The Role Of Financial Statements In Business Decision
Making. Retrieved from https://www.linkedin.com/pulse/role-financial-statements-
business-decision-making-nilesh-bakliwal

Accounting Coach. (2004) What are revenues? Retrieved from https://www.accounting

coach.com/blog/what-are-revenues

Richards, D. (2018, May 3). Using Financial Statement as a Tool. Retrieved from
https://www.thebalancesmb.com/using-financial-statements-as-a-management-tool-
1200762

Signature Analytics (2018). The 3 Major Financial Statements Every Business Owner Should
Understand. Retrieved from https://signatureanalytics.com/3-major-financial-statements-
every-business-owner-understand/

ALTWPAdmin (2016, August 29). How Do Financial Statements Help Decision Making?
Retrieved from http://www.altimabusinesssolutions.com/index.php/2016/08/29/financial-
statements-decision-making/

Edmunds, S.A. (2018, June 26) Factors Influencing Decision Making in a Business
Environment. Retrieved from https://smallbusiness.chron.com/factors-influencing-
decision-making-business-environment-65082.html

Ballada, W. (2018) “Basic Accounting Made Easy 2018”, Dondane Publisher and Made Easy
Books, Sampaloc, Manila