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
- What Is the Income Statement?
- Accrual Accounting
- The Five-Step Format
- Earnings per Share
- Analysis
- Conclusion
- Other Articles in the Financial Statement Analysis Series
Share this article
Facebook
Twitter
E-mail
SeekingAlpha
Stumbleupon
Delicious
LinkedIn
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.
What Is the Income Statement?
The income statement presents the financial results for a company over a specified period of time, typically one quarter or one year. The income statement presents the revenue (“sales”) generated during the period, the expenses incurred and the profit earned.
To read more, please become an AAII Registered User or CLICK HERE.
Discussion
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
posted about 1 year ago by robert j albers from Illinois
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.
posted 11 months ago by Lee from North Carolina
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.
posted 11 months ago by Chris from Nebraska
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.
posted 11 months ago by David from Illinois
It would be useful to compare the income statement with the cash flow statement.
posted 11 months ago by William from Arizona
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.
posted 11 months ago by David from Alabama
I have enjoyed this simple and easy method of analyzing parts of income statement.It is very helpful for an individual investors like me.
posted 11 months ago by Rao from Ohio
What an incredible job. It highlights the major components to "zoom in" when analyzing the income statement.
posted 15 days ago by Richard Dugbo from Kansas
