Income Statement & Balance Sheet Analysis

Financial statement analysis provides insight into a company's economic standing.

A company's top leadership reviews corporate financial statements on a periodic basis to ensure that such statements are accurate, complete and conform to generally accepted accounting principles (GAAP). A firm's balance sheet and income statement help gauge its economic health.

Income Statement Definition

An income statement is otherwise known as a statement of profit and loss or statement of income. It indicates a company's revenues, expenses and net income over a period of time.

Significance

An income statement is important for a firm because it provides insight into corporate profit levels in the short term and long term.

Balance Sheet Definition

A balance sheet is also called a statement of financial position or statement of financial condition. It indicates an organization's assets, debts and capital.

Importance

A statement of financial condition provides insight into a firm's monetary robustness at a given point in time. A lender may review a borrower's balance sheet before approving a loan.

Liquidity Assessment

Department heads use balance sheet amounts to compute liquidity ratios, such as current ratio or working capital ratio. Current ratio equals current assets divided by current liabilities and measures a borrower's ability to repay short-term loans.

Profitability Analysis

Segment managers analyze a company's profitability by computing profit margin from income statement data. Profit margin equals net income divided by total revenue.

References

• Investopedia: Financial Statements--Introduction