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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Joe Lan, CFA is a financial analyst at AAII.


Discussion

robert j albers from Illinois posted over 2 years ago:

Could you include material on how income statements can vary under the new effort to internationalize reporting standards, or perhaps how income statements currently vary under various international standards? Most of the largest companies in the world are not domestic in origin nowadays.

Robert Albers


Lee from North Carolina posted over 2 years ago:

This is way too complicated for a person investing in securities. This is what you learn in Accounting 102. A quick summary would be helpful, but this is just too much. As usual, it's an over-kill.


Chris from Nebraska posted over 2 years ago:

I've been studying income statements as an investor for almost 20 years and as a small businessman for over 10 years now, but this article's clear and understandable review of the different parts, highlighting the important areas, really improved my ability to find the important messages income statements should convey. Good job.


David from Illinois posted over 2 years ago:

I would call this a good basic description of how to read an income statement. Without this you don't understand the meanings of the various line items. I run into misunderstandings all the time in my business, where people who are not accountants but business guys do not understand these basics. It is not accounting 102.


William from Arizona posted over 2 years ago:

It would be useful to compare the income statement with the cash flow statement.


David from Alabama posted over 2 years ago:

This is an excellent resource and meets Einstein's admonition to "make things as simple as possible but no simpler". I plan to use this to teach my 16 year old grandson how to read financial statements this summer. I will add it to the Introduction article and look forward to the one on balance sheets. Thank you for a fine job.


Rao from Ohio posted over 2 years ago:

I have enjoyed this simple and easy method of analyzing parts of income statement.It is very helpful for an individual investors like me.


Richard Dugbo from Kansas posted about 1 year ago:

What an incredible job. It highlights the major components to "zoom in" when analyzing the income statement.


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