Purpose of Income Statement The purpose of an income statement is to convey to interested stakeholders the level of income that the company has. In general, financial statements are used to provide a consistent method of presenting financial information that is used by creditors and investors to learn more about the financial health of the company. The income statement focuses on the revenues and costs that the company has in its operations, telling the reader about the company’s ability to earn a profit (Accounting Tools, 2018).

The income statement can be evaluated on its own, but because it covers a particular time period, it also has value in conveying information across multiple time periods. A growing business, for example, will have that growth illustrated in its income statement, as its income and costs will grow over time. The income statement is therefore a valuable tool for regulators as well – it is a key source of information that could highlight accounting fraud, because there are many components of the income statement that are used by tax and regulatory authorities to determine the financial health and tax burden of the company.

Assessing an Income Statement

There are a number of different ways to analyze an income statement. Often, such analysis will be done over the course of multiple time periods, as this helps to better assess trends in a company’s income or its profitability. The first means is by compiling a vertical income statement, which compares...

This way, even when revenue is growing, the analyst can easily see whether or not the costs are growing – if they are growing faster than the revenues or slower, for example.
The horizontal income statement shows something similar, but rendered differently. With the horizontal income statement, there is a base year, and the subsequent years can be evaluated against the base year. For example, it can show that in the past five years, revenue increased 32%, but operating costs increased 38%, which would tell an analyst that costs are growing faster than revenues, on aggregate, over the course of the past five years. The horizontal analysis can smooth out some of the year-over-year changes.

Another means by which income statement information is used by relevant stakeholders is via ratio analysis. This form of analysis distills the financial information into a set of ratios, which can then be compared against the company’s past ratios, or the ratios of other companies in the industry. A ratio analysis can be particularly valuable to investigate two companies that are different sizes, and might otherwise be difficult to compare.

Assessing Ford’s 2012 Income Statement

Income statement and financial ratios can also be assessed versus industry average ratios, and this is possible for Ford as well. The website CSI Market (2018) publishes historical ratios for several industries, and therefore can be used as a source to compare these…