Income Statement Analysis
By the end of this chapter, you should be able to:
• List the three elements of every sales dollar.
• Identify the elements to be analyzed in the gross profit ratio.
• List the profitability ratios.
• Discern income trends using vertical and horizontal analysis.
Analysis of the income statement begins with sales, or more specifically, net sales. Net sales are equal to gross sales, less returns and allowances or discounts. Gross sales must not be used as the basis for percentage and ratio calculations because the amount of sales returns and allowances may be significant.
Every sales ...