The income statement is an accounting report that summarizes the flow of a firm’s revenues and expenses for a specific period. Unlike the balance sheet, it represents flow instead of static information. The income statement affects the balance sheet when the period’s net income (or loss) less any dividends, is added to (or subtracted from) retained earnings on the balance sheet. The income statement reports important information about the results of operations and gives reasons for the company’s profits or losses. The income statement may be produced annually, quarterly, or monthly. Company management uses monthly statements primarily for internal purposes, such as estimating sales and profit targets, controlling expenses, and monitoring the progress of long-term targets. Quarterly and annual income statements are especially useful to the firm’s shareholders, creditors, and competitors. The top entry of the income statement gives net sales revenue. From this total, subsequent entries subtract expenses, such as the cost of goods sold, selling and administrative expenses, research expense, interest expense, and income tax expense. This gives the famous bottom line: net income. Alternative accounting methods can also affect the size of reported net income. The methods for calculating depreciation, inventory value, and pension fund liabilities all influence the amount of reported profits. For example, historical cost accounting may understate the cost of goods sold; in an inflationary environment, this can result in an overstatement of sales, taxes, and net income. Firms generally practice accrual accounting, recognizing revenues and matching corresponding expenses at the time of sale. Unless the firm sells its products only for cash, recognizing revenue does not mean that a cash inflow has occurred; cash will not flow into the firm until some time in the future, when the customer makes a payment on an account. Similarly, matching expenses to revenue distorts the perception of cash outflows. Firms must pay for many matched expenses, including raw materials production costs, and labor expenses, before they sell the corresponding goods. In addition, some income statement expense items do not reflect cash outflows, for example depreciation expense. Thus, positive net income does not necessarily mean that cash inflows exceed cash outflows; neither does a negative net income figure imply imminent bankruptcy. The analyst needs a better tool than an income statement to determine the cash flows of a firm, which is the purpose of the statement of cash flows. In sum, income statement is a financial report that summarizes a firm’s performance over a specified time period.