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How to Read and Interpret Financial Statements by Michael P. Griffen

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8

Income Statement Analysis

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Learning Objectives

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.

SALES

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 ...

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