42 A MaNaciie’s GUIDE To FINANCIAL ANALYSIS E xhibit 3-2 Comparative Income Statement Comparative Income Statement for the Years Ended December 31, 2013 and 2012 2013 2012 Net Sales $500,000 $320,000 Less Cost of Goods Sold 229,000 158,000 Gross Profit $271,000 $162,000 Less Operating Expenses: Selling Expenses 82,000 40,000 Administrative Expenses 55,000 Total Operating Expenses Operating Income $134,000 Add Other Income: Rent Less Other Expenses: Interest Expense Income before Income Taxes Income Tax Expense Net Income based on applying calculations across the year, while finance-oriented analysts use end-of-year numbers. Both calculation methods have merit and both have flaws. The accounting-oriented analysts frequently use a ratio denominator defined as “average,” determined as “beginning plus ending divided by two.” Because the beginning balances, which are the prior year's ending balances, and the ending balances, drawn from the more recent end-of-year results, are based on balance sheets that have been dressed up as favorably as possible, the “average” may not bear any relationship to the true average balance during the year. That will be particularly true if there has been any acquisition or disposal or discontinuation activity during the year or if the business has grown significantly from year to year or exhibited any significant seasonality. “That said, the finance-oriented analyst, using year-end mumbers, will cal- culate ratios that are really not a true measure, either. The year-end numbers are dressed up to look as favorable as the company can reasonably make them. ‘The results will obviously not be truly representative of the company’s overall performance, Therefore, the finance-oriented analyst will apply an evaluation that may be characterized as an “If the numbers are as good as possible and the ratio is only fair, what does their real performance look like2” approach. ‘The analyst must always be cognizant of the interpretation of the calculation results. One important consideration regarding the finance-oriented analysis is that, because accounting policies and practices are usually consistent from ‘© American Management Association. All rights reserved. hitpsiiwwnwamanet org!