Income Statement Financial Analysis

Financial statement analysis is a method of reviewing a nd analyzing a company s accounting reports financial statements in order to gauge its past present or projected future performance.

Income statement financial analysis. This analysis is used to understand the cost structure of a business and its ability to earn a profit. The income statement is broken into. Since the income statement is a measure of profitability the first thing we want to do is analyze some of the profitability measures. Income statements are also carefully reviewed when a business wants to cut spending or determine strategies for growth.

The income statement presents information on the financial results of a company s business activities over a period of time. 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. We are going to calculate the gross margin to look at profitability as a percentage. With this method of analysis of financial statements we will look up and down the income statement hence vertical analysis to see how every line item compares to revenue as a percentage.

The analysis of the income statement involves comparing the different line items within a statement as well as following trend lines of individual line items over multiple periods. The income statement communicates how much revenue the company generated during a period and what cost it incurred in connection with generating that revenue. The first one is gross profit which is the profit the company made on sales after cost of goods sold. The income statement also known as the profit and loss p l statement is the financial statement that depicts the revenues expenses and net income generated by an organization over a specific.

For example in the income statement shown below we have the total dollar amounts and the percentages which make up the vertical analysis. Financial analysis of an income statement can reveal that the costs of goods sold are falling or that sales have been improving while return on equity is rising. An income statement vertical analysis provides you with a look at the cost of goods sold gross margin and your expenses as a percentage of the value of sales for the period. It can be used to show the percent any of the line items are of your total assets.