A sound financial plan is rooted in knowing the basics of accounting. Technicalities and definitions aside, accounting can be fairly easy to understand. If an ordinary investor doesn’t have time to get down all the basics of accounting, then the least he can learn is the income statement.
The income statement shows exactly what it says : income. Specifically, it shows how much the business has earned for a specific period of time. The top number shows the gross receipts or pure income, while the bottom shows the net income, or profit that has already been calculated with deductions. The figures in the middle are the expenses related to the production and distribution of the company’s products.
This financial statement is therefore the easiest to understand as it shows money earned and spent as inputs and outputs. It also shows the most common accounts being used by the company such as salaries, utilities, and administrative expenditures. Just as importantly, it shows the tax amount meant to be payed by the company for that period.
The key to understanding the income statement is familiarity both with the company and the financial statement itself. Most managers and executives who don’t have any background in accounting will make up for it by their expertise in the company’s production or marketing department. These are then translated into numbers which are then easily read as the income statement.
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