Though learning basic accounting may not be the most enjoyable exercise, knowing how to interpret a company's financial statements is critical to understanding how a business is performing as well as figuring out if a stock is a good value.
In Lesson 107, we gave a basic introduction to financial statements. In this section, we will dig deeper and devote a lesson to each of the three main financial statements: the income statement, the balance sheet, and the statement of cash flows. Lessons 304 and 305 will help you use each of these statements to get a picture of a company's financial health and performance.
First up is the income statement, which summarizes how the company's operations performed during a given period. It tells you how much money a company has brought in (its revenues), how much it has spent (its expenses), and the difference between the two (its profit). Did the company make a profit during the period? Did it improve its business over last year? The income statement will provide you with this information, and more.
Next, we will walk through the different components of the income statement and illustrate how they may vary across different companies. By the end of the lesson, you should have a grasp of how to read an income statement, and you'll be able to test your knowledge by answering questions using a fictional company's income statement.