If you want to pick stocks, you must understand the income statement.
Here's how to read one:
(even if you're a beginner)
Here's how to read one:
(even if you're a beginner)
The income statement is 1 of 3 financial statements that break down a company’s performance.
It highlights a company’s income through a specific time period.
Here’s how to calculate it:
Net income = (Total Revenue + Gains) - (Total Expenses + Losses)
It highlights a company’s income through a specific time period.
Here’s how to calculate it:
Net income = (Total Revenue + Gains) - (Total Expenses + Losses)
There are 4 components to an income statement.
- Revenue
- Gains
- Expenses
- Losses
Let’s break those down:
- Revenue
- Gains
- Expenses
- Losses
Let’s break those down:
Revenue
There are 2 ways a company generates revenue.
- Operative activities (core business model)
- Nonoperating activities (secondary business model)
Operating activities are things like selling products and services.
Nonoperating activities are things like rental income.
There are 2 ways a company generates revenue.
- Operative activities (core business model)
- Nonoperating activities (secondary business model)
Operating activities are things like selling products and services.
Nonoperating activities are things like rental income.
But remember, revenues don’t mean the cash exchanged hands.
When a sale is made, it will be recorded as revenue
Regardless of whether payment has been received.
The same applies for expenses.
So a company's net income may not always reflect their actual income.
When a sale is made, it will be recorded as revenue
Regardless of whether payment has been received.
The same applies for expenses.
So a company's net income may not always reflect their actual income.
Gains
This is “other income” from non business activities.
Think of selling assets that are no longer used.
This can be things like:
- Old equipment
- Unused property
- Subsidiary companies
This is “other income” from non business activities.
Think of selling assets that are no longer used.
This can be things like:
- Old equipment
- Unused property
- Subsidiary companies
Expenses
This is what it costs for a company to earn revenue.
There are 2 types of expenses:
- Primary activity (operating expenses)
- Secondary activity (non operating expenses)
Primary activities can be the cost of goods sold.
Secondary activities can be interest expenses.
This is what it costs for a company to earn revenue.
There are 2 types of expenses:
- Primary activity (operating expenses)
- Secondary activity (non operating expenses)
Primary activities can be the cost of goods sold.
Secondary activities can be interest expenses.
Losses
Losses are expenses related to anything other than the purpose of earning revenue.
Think of selling an asset for less than it was purchased.
Or lawsuit settlements.
Losses are expenses related to anything other than the purpose of earning revenue.
Think of selling an asset for less than it was purchased.
Or lawsuit settlements.
Although the basic components of an income statement are revenue, gains, expenses and losses
There are other line items that may be included.
Here they are:
- Product-level revenue
- Cost of goods sold
- Gross profit
- Administrative expenses
- Interest expenses
There are other line items that may be included.
Here they are:
- Product-level revenue
- Cost of goods sold
- Gross profit
- Administrative expenses
- Interest expenses
The income statement works best when you compare it to competitors and to previous income statements.
This highlights how well a company fares against its competition.
And what kind of changes they’ve made since the last income statement.
This highlights how well a company fares against its competition.
And what kind of changes they’ve made since the last income statement.
Thank you for reading!
If you learned from this thread, please:
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If you learned from this thread, please:
1. Follow @WOLF_Financial
2. RT the first tweet so others can see it
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