A budgeted income statement is a projection of a company’s future revenues and costs based on past income statements. It helps companies estimate future profitability and identify flaws in their economic plans. It should be used in conjunction with a budgeted balance sheet to get an estimate of a company’s future prospects.
A budgeted income statement is an effort by a business to project its revenues and costs into future time periods. It is formatted exactly like an actual income statement, but all values included are estimates based on past income statements. The accuracy of a budgeted income statement depends on the accuracy of the values that the company includes. While it provides no guarantee that a company’s actual income statements will look like this in the future, the budgeted statement can reveal flaws in the company’s future economic plans.
Companies prepare income statements both for tax purposes and to display to investors or shareholders as a measure of financial condition. The basic format requires that all sales a business makes be added up and then set against the cost incurred during business operations. But a company should always look forward to its business prospects in future time periods. That’s where a budgeted income statement comes in handy, as it allows a company to estimate whether its future business plans will be profitable and sustainable.
When a company prepares a budgeted income statement, it includes all the items that are included in its actual income statement. This would include revenue generated from sales at the top of the statement, which is then reduced by all operating expenses incurred by the business. These expenses include the cost of goods sold, which is the cost required to manufacture the products that generate the sales totals, as well as selling and administrative expenses and interest expense. The resulting difference is the net income.
With a budgeted income statement, all of these totals are projected from previous income statements. A company may adjust the numbers in some way to account for expected changes in future time periods. But these changes should not be overstated, otherwise the budgeted statement threatens to become more of a fantasy than a realistic projection.
It is advisable for a company to use a budgeted income statement in conjunction with a budgeted balance sheet. Just as the actual income statement is studied in conjunction with a balance sheet to get a fair picture of a company’s current financial strength, the projections in these documents can give an estimate of its future prospects. If the projections reveal any unsustainable results, such as substantial debt, the company may make adjustments to rectify the problem before it occurs.
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