Investing Classroom: The income statement

Stocks lesson 3.1: You needn't be an accountant to have the skills to interpret a company'

Morningstar 02.02.2010

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.

We have already given a basic introduction to financial statements. We will now 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.

First up is the income statement, which summarises 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.

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