There are three main financial statements published in the company annual report: the balance sheet, the cash flow statement and the income statement. The income statement provides an overview of company revenues, expenses and earnings for the fiscal year. Most companies report several years of income statement data side by side. This is referred to as a comparative income statement.
Comparative Income Statement
The income statement provides readers with net income. Net income is one of the most popular measures of financial performance used by analysts and investors. However, it is important to interpret the income statement in the most insightful way. A comparative income statement provides the reader with at least two years of income statement data side by side as a way to assist with the interpretation.
While the income statement provides readers with a net income, it often varies from cash flow. This is because the net income statement is geared toward the IRS for tax purposes. As a result, it takes all deductions and income adjustments into consideration before considering the amount of income for tax purposes. The income statement, therefore, is not the best indicator of profitability unless compared against other years for trend analysis.
Trends allow analysts to make basic assumptions about the nature and degree of change each account has from year to year. This allows the analyst to make recommendations based on historical performance. It is not uncommon for management to discuss changes in sales, expenses, inventory costs, taxes, and net income based on the comparative income statement.
Annual reports must be submitted every year. Sometimes the company must make provisions or estimates for certain line items on the income statement because the tax year has not ended yet. A company may also make incorrect economic forecasting assumptions. In these cases, the company will issue a restatement that will be shown side by side the following year in a comparative statement.