The Adequacy of the Preffered Presentation Format of the Income Statement in Providing Information to Investors

Abstract

The study aimed at examining the adequacy of the preferred presentation format of the income statement in providing information to investors. To achieve this, the study set out to identify the information that investors look for in the income statement and the most preferred income statement presentation format by investors. The study used 44 University of Nairobi MBA students as surrogate investors. The study adopted a descriptive research design. Primary data was used to accomplish the stated objectives. The primary data was collected using questionnaires which were administered by direct interaction with the respondents. Attached to the questionnaire were the ‘by nature’ and ‘by function’ presentation formats of income statements of a dummy company developed according to the provisions of IAS 1. The respondents were required to indicate their preferred presentation format of the income statement. The questionnaire sought the investors’ opinion on the two alternative presentation formats of the income statement, in meeting the qualitative characteristics of accounting information of relevance, understandability, comparability and reliability. The study also sought to identify the information investors look for in the income statement and its relative importance. The two alternative formats were then analyzed to find out which of the two displays the information considered to be important to the investors. The ‘by nature’ presentation format of the income statement was found to be the most preferred by investors and was the most adequate in providing information to investors. The study also showed that the income statement has several limitations