Income statement is generally based on the equation "revenue - expenses = profit". It mainly reflects a certain period of time the company's operating income minus operating expenses after the net income. Through the income statement, we can generally evaluate the business performance of listed companies, the degree of success of management to make an assessment, so as the value of investors' investment and remuneration.
The income statement includes two aspects: one reflects the company's revenue and expenses, indicating the amount of profit or loss of the company in a certain period of time. Then evaluate the company's management performance according to the analysis of the company's economic efficiency and profitability. The other one reflects the sources of the company's financial results, indicating the company's various sources of profit in the total profit accounted for the proportion and the interrelationship between these sources. The analysis of the income statement is mainly based on these two aspects.
The company obtains the operating income through the sale of products and services. Alternatively it could provide assets for others to use and obtain non-operating income such as rent and interest. An increase in revenue means an increase in the company's assets or a decrease in liabilities.
Credited to the revenue account includes the current receipt of cash income, notes receivable or accounts receivable. It will be recorded at the actual amount received or book value of the account.
Expenses are the deduction of income. Thus the recognition of expenses as well as deductions directly affects to the company's reported profit. When analyzing expenses, we should first pay attention to whether the appropriateness of the expenses. When confirming expenses, we should see whether to apply the accrual principle, historical cost principle, and the principle of dividing revenue and capital expenditures. Secondly, we should analyze the cost structure, the percentage of operating income they occupied and their trend. And identify the reasons if they are not reasonable. At the same time to analyze the cost of each item and their trends in order to evaluate the company's management level as well as financial situation.Then finanlly predict the company's development prospects.
Income statement should be linked with the statement of financial position of the company when we looking at it. It mainly illustrates the production and operation status of the company such as: profit realization and distribution, accounts receivable and inventory turnover, changes in property and materials, tax payments and matters that are expected to have a significant impact on changes in the company's financial status in the next accounting period. The statement of financial position provides detailed information for financial analysis to understand and evaluate the company's financial position.