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In today's article cheap nike air vapormax mens , we'll be looking at the income statement, which is the most deceptively simple of the major financial statements. I say simple because it's just a list of all the revenue, minus all the expenses, to calculate what's left over in profit. It's no more difficult than putting your family budget together, right?


That's where the deceptive part of the description comes in. The items on the income statement are easily manipulated by, say nike air vapormax flyknit wholesale , less-than-honest management, and don't necessarily represent the true situation at a company. Even totally honest companies can have income statements that don't represent economic reality. Cash flows define economic reality, revenue and expenses define accounting reality.


You see, the difference between your household budget and a company's income statement is their relationships to actual cash flows. Your household budget will generally match your cash inflows and outflows. Not so with an income statement. Income statements can vary significantly from the company's cash flow, meaning that a company in economic trouble can show a very ?good? income statement up until the day it goes bankrupt.


Generally speaking, though cheap nike air vapormax flyknit , the income statement is a good place to start when evaluating a company. In my forthcoming e-book, Fundamentals of Financial Statement Analysis, I lay out the process for evaluating the health of a company through the financial statements. I'm shooting for publication in the beginning of 2004, but in the meantime, here are some tips and strategies for evaluating an income statement.


1. Create a Common Size Statement


What's a common size statement, you ask? It's the income statement nike vapormax plus wholesale , only with each line item represented as a percentage of sales. This is easy to do with a spreadsheet on your computer, but you can do it on paper just as well. Net Sales is always 100% at the top, and each of the expenses is divided by total sales to arrive at a percentage. For example, if a company has $100 in sales and $50 in cost of goods sold, the common size statement will look like this:


Sales 100%


Cost of Goods Sold 50%


Gross Profit 50%


The importance of the common size statement can't be overstated. It gives you the calculation of all your profit margins, from gross to net cheap nike air vapormax plus , and shows how much each cost item takes away from your profits.


2. Create a Year-to-Year Comparison Statement


The next step is to make a year-to-year comparison statement. You can't evaluate financial statements for just a single year; they have to be compared to previous years. The only formula you need to know for these calculations is:


(current year previous year) ? 1 = % change


Again, a spreadsheet makes this process so much easier, but it can be done by hand. I like to have five years of data, which yields four years of comparison data. This way you aren't just looking at an exceptionally good or bad year for the analysis. Plus, you can get a reasonable estimate of future growth when you do your discounted cash flow analysis. (I'll have more on the Discounted Cash Flow in the future.)


3. Read the Management Discussion and Analysis


If you take the time to read the MD&A, you'll have an advantage on most investors. A majority of individual investors simply skip this part cheap nike air vapormax , and go right to calculating ratios or looking at the EPS. Seasoned investors know that the MD&A provides the backup data for the income statement line items, and they will take time to read it.


A good Management Discussion and Analysis will give you the details you need to understand the items on the income statement. You should get segmented sales data, cost drivers, etc. in this section. If you can't make sense of the MD&A, that should set off alarm bells in your head. If you don't find the information you need in the MD&A, you should?


4. Look at the Notes to Consolidated Financial Statements (Footnotes)


The footnotes tend to be more difficult to understand than the MD&A nike air max 270 womens sale , but you get really detailed information here. The footnotes are where management hides the dirty laundry. And when you've got guys making today's corporate salaries that laundry pile can get pretty big. Here's where you'll likely find what you couldn't in the MD&A, it's just that in the notes you may have to do some putting of two and two together.


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