Q Explain why an analyst attaches great importance to evaluation of the income statement

Answer
Meaning of Income Statement-Income statement is a financial statement prepared by management of
a company to express the performance of a company. Other financial statements are -a) Balance
Sheet; b) Statement of Owner's equity; c) Statement of cash flow.

Contents of Income Statement are-

i) Revenue
ii) Cost of goods sold
iii) Gross Profit or gross margin
iv) Selling, General and Administrative expenses
v) Operating Income
vi) Interest expenses
vii) Profit before tax or PAT
viii) Tax on income- refers to the tax payable/paid on PAT.
ix) Net Income= PAT- Tax

Reason for an analyst to attach great importance to evaluation of the income statement are-

i) Income statement gives a summary of the company's revenue and expenses for a particular period.

This figure helps the analyst to figure out the growth in revenue on quarter-to-quarter basis (QoQ), or
on Year-to-Year basis (YoY).

Similarly, expenses can be analysed on quarter-to-quarter basis (QoQ), or on Year-to-Year basis

(YoY).

ii)Income statement gives overall profitability of the company for a period i.e., a quarter, half year or
for the full year.

Hence, profitability can be analysed on quarter-to-quarter basis (QoQ), or on Year-to-Year basis

(YoY).

iii) Analysis of the past performance of the is possible and on the basis of past performance, future
performance of the company can be predicted.

iv) Analyst can measure the Gross Profit Margin and Net Profit Margin.

Gross Profit Margin shows the efficiency with which company produces each unit of product,
whereas Net Profit Margin shows the ability of the company to turn each $ of sales into net profit. If
the net margin is not sufficient, the company will fail to give satisfactory return on shareholder's
funds.

v) Inter-company comparison can be carried out and this helps the analyst to interpret the trend of the
business.