How to Read a Financial Report, 10th Edition

3BEDROCK FINANCIAL STATEMENT #1: THE INCOME STATEMENT

Every business needs to produce financial information for both internal and external parties to assess, analyze, review, and base business decisions on. Financial information comes in many different shapes, sizes, and forms and can range from a simple sales report (e.g., displaying sales by different product types generated over a three-month period), to periodic financial statements, to producing a complete year-end financial report. For the purposes of this book, we will focus our attention on the production and analysis of financial statements because this financial information is absolutely essential for both internal and external parties. It also represents the meat and potatoes of a company’s annual financial report.

This chapter and the next focus on the two bedrock financial statements that people are the most familiar with, the income statement and the balance sheet (Chapter 4). I want to emphasize, that does not aim to disrespect the statement of cash flows in any way, and I have already emphasized its importance. However, when it comes to diving into financial statements, nearly everyone wants to first (and often only) understand how much sales revenue a company generates and what profit or loss is being realized on a periodic basis. These two critical pieces of information are located in, you guessed, the income statement.

The Income Statement: A Closer Look

So why do we start with the income statement? Because ...