The income statement, also known as the statement of operations or profit and loss (P&L) statement, tells you about the company's revenues, expenses, and profit.

When analyzing an income statement, I always start at the top. The top line for most companies is sales revenue (for a bank, however, the top line would be interest revenue), and you can compare it to prior periods to identify the trend. Are sales increasing or decreasing? If sales declined, what happened? If sales increased, on the other hand, it could be that:
(a) the company introduced a new product
(b) the company started selling its existing products in new markets
(c) the company opened additional stores (if it's a retailer)
(d) the company stole market share from a competitor
(e) the company acquired another company (so now you're see the combined revenues of the two firms)
(f) the company engaged in aggressive revenue recognition

Thus, it's important to understand not just that sales increased or decreased, but the reasons for the change.

If sales increased but profits declined, then the company's expenses grew faster than its sales. Inspect the expenses to see what happened. Was there a one-time charge like a goodwill impairment? Or is it a more fundamental problem, like cost of goods sold or SG&A expense growing faster than sales?

You can further assess the company's ability to manage its expenses by creating a common-size income statement for the past few periods. Analyze the trends in these figures over time, and benchmark them against the same figures for the company's competitors. Is COGS as a % of sales increasing over time? Is COGS as a % of sales higher than that of competitors?

You can then perform a cause-of-change analysis to understand exactly why a company's net income increased or decreased from the prior period. If net income increased by $1 billion, how much of this was attributable to increased sales? How much was attributable to better margins?

Thus, while the balance sheet can be used to tell you about a company's liquidity and creditworthiness, the income statement can be used to tell you about a company's performance.
—
Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education freely available to the world.
—
SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS:
• A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING
• A 44-PAGE GUIDE TO U.S. TAXATION
• A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS
• MANY MORE FREE PDF GUIDES AND SPREADSHEETS
* http://eepurl.com/dIaa5z
—
SUPPORT EDSPIRA ON PATREON
*  / prof_mclaughlin  
—
GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT
* https://edspira.thinkific.com
—
LISTEN TO THE SCHEME PODCAST
* Apple Podcasts: https://podcasts.apple.com/us/podcast...
* Spotify: https://open.spotify.com/show/4WaNTqV...
* Website: https://www.edspira.com/podcast-2/
—
GET TAX TIPS ON TIKTOK
*   / prof_mclaughlin  
—
ACCESS INDEX OF VIDEOS
* https://www.edspira.com/index
—
CONNECT WITH EDSPIRA
* Facebook:   / edspira  
* Instagram:   / edspiradotcom  
* LinkedIn:   / edspira  
—
CONNECT WITH MICHAEL
* Twitter:   / prof_mclaughlin  
* LinkedIn:   / prof-michael-mclaughlin  
—
ABOUT EDSPIRA AND ITS CREATOR
* https://www.edspira.com/about/
* https://michaelmclaughlin.com