The Income Statement and Investor Information

If you’re an investor, and you are trying to make a determination about the financial health of a business, you would need to read the Financial Statements in order to correctly ascertain this condition.  Each year, publicly traded companies are required to publish an annual report; in this report, there are at least three financial statements:

An Income Statement, a Statement of Financial position and a Statement of Cash Flows must be included with the report.

What are investors looking for when they review the Annual Report, and examine the Income Statement? 

Net earnings figures in the operating activities information is hard to dispute; either the business was profitable, or it was not.  The Income Statement is intended to help investors accomplish the following objectives:

  •             Evaluate the past performance of the business
  •             Predict future performance of the business
  •             Assess the risk of achieving future cash flows

The Income Statement that is included with an Annual Report will be a compilation of the past year.  The income and expense figures shown are a composite of the immediate previous year; a review of several years worth of these statements will help you to assess the past performance and predict future performance for the business, so long as other important variables haven’t experienced extreme changes.  As noted in earlier articles, there are some items that are non-cash transactions that have an impact on the business operations, but cannot be reliably measured and reported in the Income Statement.  Some examples are goodwill, changes in inventory accounting methods, and equipment values that depend upon judgments and estimates to establish a market value.  These transactions are most often noted in the Statement of Cash Flows.

In assessing the risk of achieving future cash flows, the Income Statement and the Statement of Cash Flows must be reviewed simultaneously for significant changes, and any notations studied that are included and amended to the reports.

The analysis of the Annual report and the financial statements contained therein cannot be accomplished unless you have an education in accounting, finance, or have otherwise managed to educate yourself about the elements of the statements.  However, if you’re an investor, take the reports to your broker.  They are trained to examine and analyze these statements; they can provide you with the analysis and interpretation of information into a format you can understand and act upon.

As you can see, just from this short analogy, the importance of the Annual Report and the financial statements that are a part of the report, are a tremendous opportunity for the investor to examine public financial information and help make educated, sound investing decisions.

Categories Accounting, Business

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