A budgeted income statement is an effort by a company to project its income and costs into future time periods. It is formatted exactly the same as an actual income statement, but all of the values included are estimates based on past income statements. The accuracy of a budgeted income statement is dependent upon the accuracy of the values which are included by the company. While it provides no guarantee that a company's actual income statements will look like it in the future, the budgeted statement can reveal flaws in the company's future economic plans.
Income statements are prepared by companies both for tax purposes and to show to investors or stockholders as a measurement of financial standing. The basic format requires that all of the sales that a company makes be added up and then set in opposition to the cost incurred during business operations. But a company should always be looking forward to its business prospects in future time periods. That is where a budgeted income statement comes in handy, as it allows a company to estimate if its future business plans will be profitable and sustainable.
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When a company prepares a budgeted income statement, it includes all of the items that are included on its actual income statement. This would include the revenue generated by sales at the top of the statement, which is then diminished by all of the operating expenses that are incurred by the company. These expenses include the cost of goods sold, which is the cost that it takes to manufacture the products that generate the sales totals, as well as sales and administrative expenses and interest expenses. The resulting difference is the net income.
With a budgeted income statement, all of these totals are projected from past income statements. A company may adjust the numbers somewhat to account for expected changes in future time periods. But these changes must not be exaggerated too much, or else the budgeted statement threatens to become more of a fantasy than a realistic projection.
It is wise for a company to use a budgeted income statement in conjunction with a budgeted balance sheet. Just as the actual income statement is studied along with a balance sheet to get a proper picture of a company's current financial strength, the projections of these documents can give an estimation of its future prospects. Should the projections reveal some unsustainable outcome such as substantial debt, the company can make adjustments to rectify the problem before it occurs.