How to Analyze an Income Statement
When analyzing an income statement, look at the horizontal analysis, trend analysis, vertical analysis and ration analysis to determine the business's standing in the market. Gather all prepared financial statements to analyze a business with advice from a certified public accountant in this free video on starting a new business.
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There are basically four analytical techniques use when you want to analyze your financial statements and first of all you need to know what you're looking at. So you want to have your prepared financial statements out whether you have a just a revenue and expense sheet or your income statement and balance sheet; that's prepared by your accountant. The more formal they are, probably the better shape they're in as far as giving you good information. There are four trends that you can look at; you have your horizontal analysis which you compare from one period to another. And so that is going to tell you whether your performance is better or worse in some other period. You have your trend analysis, what direction are you going? Are you going up compared to last period up, compared to last year, down compared to your budget? So you're going to look at the trends and that's going to give you information that you need as well. You want to look at your vertical analysis; what is the rest of the industry doing compared to what you're doing? Are they above your trends, are they below it? What are you doing to fit better within where you think you need to be in your performance. And finally there's ration analysis. You want to take your own financial statements, look at your bottom line on your net income, look at your revenue and your expenses; see where that trend is going, do your ratio analysis on those and see if they fit in to where your industry trends are and where you need to be.