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Category: Business and Industry
Date Submitted: 10/02/2016 12:19 PM
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...