Reading the Income Statement
The income statement is typically the financial statement that receives the most attention. It reports a company’s performance over a period of time, typically either one quarter or one year. According to Financial Statement Analysis : A Global Perspective the format of an income statement is:
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- Cost of goods sold |
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Equals Gross profit |
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- Operating expenses |
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Equals Operating profit |
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+ Non-operating income and gains |
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- Non-operating expenses and losses |
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Equals Pre-tax income |
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- Income taxes |
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Equals Net income |
The top line number is sales – how much revenue a company has taken in from its customers during the period reported. The middle section deducts any expenses the company incurs during the course of doing business. When these expenses are subtracted from sales we have net income – literally the bottom line.
Not all companies use exactly the same terminology. For example, sales are sometimes called Revenues or (in the UK) Turnover. The terms income and profit are also frequently interchanged. Further, each company may have its own specific line items for various expenses normal to that business, but which other companies do not report.
More important, however, is the fact that each line must be analyzed carefully to uncover the secrets it has to tell about how the company is faring in the markets. This analysis can be quantitative (how much were sales and how much did they grow) or qualitiative (what accounting method does the company use to recognize sales). Over the next few days, this series will address how to analyze each part of the income statement, starting tomorrow at the top – sales.
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