Which financial statement is commonly used to analyze variances?

The income statement is the financial statement most commonly used to analyze variances, particularly in a budgeting context. It provides detailed information on revenues and expenses over a specific period, enabling comparison against budgeted figures or prior period results. Variance analysis often examines the differences between actual performance and expected performance—this is typically done through revenue variances (which assess how actual sales differ from forecasts) and expense variances (which evaluate how actual costs compare to budgeted costs).

For instance, if a company's actual sales exceed its budgeted sales, this positive variance can indicate strong performance or effective management strategies. Conversely, if expenses were higher than anticipated, it may highlight areas where cost control could be improved. The income statement provides the data necessary to perform this critical analysis, making it an essential tool for management in performance evaluation and strategic planning.

Other financial statements also serve important functions but do not facilitate variance analysis in the same manner. The balance sheet presents a snapshot of a company's assets, liabilities, and equity at a particular point in time, without reflecting performance over a period. The cash flow statement focuses on the inflows and outflows of cash, which is important for liquidity analysis but not typically for variance analysis related to revenues and expenses. The statement of retained