The Income Statement: From Net Revenue to Net Income
by Joe Lan, CFA
The income statement arguably presents the most important figure that companies report—earnings per share.
Earnings results are followed closely by numerous investors, ranging from individual investors to analysts working at financial research and brokerage firms. Earnings provide an ongoing score of a company’s success or failure and are used to determine a company’s value. A firm’s worth is dependent on its ability to earn money and generate future cash flows; reported earnings that differ, positively or negatively, from expectations (called an earnings surprise) can cause large movements in a stock’s price.
In this article, the second part in AAII’s Financial Statement Analysis series, I explain how to read and analyze an income statement. I discuss the major elements found in the income statement and show how each is used in stock analysis. The first article in this series, “Introduction to Financial Statement Analysis,” was published in the January 2012 AAII Journal and can be found at AAII.com.
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