Chapter 5
Incoming Income
IN THIS CHAPTER
Surveying the parts of the income statement
Evaluating the income statement for quality of earnings
How can you tell whether a company is successfully generating wealth beyond the wildest dreams of its owners, providing them with levels of luxury understood only through ancient mythology, or dooming them to a life of desperate poverty from which they may never escape, or something in between? By looking at the company’s income statement. Simply put, the income statement is a financial report that describes whether a company is thriving in its pursuit of income or flushing money down the toilet.
In this chapter, I break down the income statement in the order that it’s written, starting with the total amount of money made and then going through all the additional revenues and all the costs, until I end with a profit (or loss, if your company isn’t doing so well).
Adding It Up
Income statements come in two types: single-step and multiple-step. They’re essentially the same thing except that a multiple-step income statement provides more detail, so I focus on the multiple-step version in this chapter. For a rundown of single-step income statements, see the upcoming sidebar.
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