Importance Of Income Statement Analysis

For example you can compare one company s profits to its competitors by examining its gross profit margin operating profit margin and net profit margin.

Importance of income statement analysis. The total revenues and expenses of a company are listed on its income statement. 2 importance of income statement the balance sheet is a snapshot of the companies assets liabilities equity and debt. Analysts investors stockholders potential investors and lenders use these reports in order to assess the financial health of a business. The income statement is important because it clearly states whether a company is making a profit.

The importance of financial statement analysis can be seen in how the practice may be pivotal for management to understand levels of cash receipts and disbursements in corporate operations. The importance of this report and the ability to accurately read and analyze the information is invaluable to an accountant. A statement of cash flows lists cash flows related to operating activities investments and financing transactions. A sample income statement was provided in the first article in this series.

The importance of the income statement there are four basic financial statements. It provides all the data from sales to profits operational efficiency to other non operational aspects. Balance sheet cash flow statement income statement and statement of retained earnings. Hence the income statement is an ideal source for complete revenue information.

Database for investor analysis. Income statement analysis investors can use income statement analysis to calculate financial ratios that can be used to compare the same company year over year or to compare one company to another. Use these statements to gain insight into the financial health of a company. It is an important document for investors who need detailed information before investing into any company.

All analysts and research houses who track the company make extensive use of the income statement to analyze forecast and do a valuation of the company which is used to make a future economic decision on the company. It does not show what actually happened in the period that caused the company to get to the position where it is now. Therefore profit figures on the income statement are important to the investors. The income statement is vital for ratio analysis valuation equity research of the company.

Subtracting the expenses from revenues provides the total profit during the given accounting period usually a year or a quarter of a year.