Financial-Statement-Analysis-a-Look-at-the-Income-Sheet

FUNDAMENTALS

FINANCIAL STATEMENT ANALYSIS:

A LOOK AT THE INCOME SHEET

By John Bajkowski

The goal of the

income statement is

to determine revenue

for the period

covered and then

match the

corresponding

expenses to the

revenue. It presents a

picture of a

company’s

profitability over the

entire period of time

covered.

The income statement reports on one of the most critical company figures—

its earnings per share. Over the long run, a stock’s value is dependent upon its

earnings potential. Investors closely monitor earnings announcements. Stock

price can nose dive when earnings expectations are missed by even a few

pennies. Therfore, it is important to be able to read and understand an

income statement and identify trends of key items that impact earnings.

This fundamentals article is the second in a series on financial statements—

how to read them and use them for stock analysis. The balance sheet was

introduced in the January 1999 AAII Journal. This fundamentals article will

examine the income statement.

Every other issue of the AAII Journal this year will carry an article exploring the use and interpretation of financial statements. We are collecting and

organizing these articles under the heading “Focus on Financial Statements”

within the stocks area on our Web site (www.aaii.com/stocks/). We are also

publishing member questions and answers related to financial statements. If

you have any questions or comments, please E-mail them to

financials@aaii.com.

THE INCOME STATEMENT

The goal of the income statement is to determine revenue for the period that

it covers and then match the corresponding expenses to the revenue. The

income statement, sometimes referred to as the statement of earnings or

statement of operations, presents a picture of a company’s profitability over

the entire period of time covered. This is in contrast to the balance sheet,

which presents a snapshot of a company’s financial condition at a specific...