Given the importance of earnings (also known as net profits), one of the key documents for assessing a company is its income statement. An income statement is nothing more than a company’s equivalent of your checking account statements. The single most important bit of information one should glean from the income statement is the quality of a firm’s earnings.
Like a balance sheet, income statements are usually displayed on-line as a long document with one section following the next. There are the main sections to an income statement – revenues and gross profit, operating expenses, operating income and net income, and finally earnings-per-share. Revenues: Just as your paychecks are deposited to your bank account, a company receives and records what it makes from selling its goods and services.
Cost of Goods: This is the sum of what the company paid out for the raw materials it had to buy to make its products. Non-Operating Income: This is extra money the company brings in outside of its normal line of business.


The net income line is very important because the company’s net income is divided by the number of shares outstanding to arrive at how much money the company made in profits per share.
One broad test for measuring how well a company manages its expenses is to compare how quickly a company’s expenses are growing compared to the growth rate of its sales.
The income statement identifies the company’s major sources of revenue and expenses, as well as income taxes, and it sums things up on the line labeled net earnings or net income.
It’s what the company has left over from its sales after paying for producing its products.
They have to hire salespeople to sell them and staff to run the office, sign the checks, and plug in the computers.
This is how much a company ends up with from its sales after all operating costs and general expenses are accounted for. Overall, this is an indication that the company continues to find favor with its customers, and is able to sell more of its goods and services. Say for example a company sold $100 million worth of products the year before last, and it cost them a total of $80 million in expenses to earn those sales.


Inefficient companies typically pay dearly for extra sales – hiring too many sales people, buying raw materials at a premium, pouring millions into a massive ad campaign, and so on. A manufacturing company for instance, may have realized its product line is quickly becoming outdated and decided to invest a load of cash into research. For example, money spent wisely on research & development today may result in a company producing a world-leading product in the future. Net income is divided into the number of shares outstanding to arrive at how much money a company makes per share.



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