The Comparative Income Statement Gives an Idea

The income statement gives the results of the operations of a business. The comparative income statement gives an idea of the progress of a business over a period of time. The changes in absolute data in money values and percentages can be determined to analyze the profitability of the business. Like the comparative balance sheet, the income statement also has four columns. The first two columns give figures for various items for two years. Third and fourth columns are used to show an increase and decrease in figures in absolute amounts and percentages respectively.

Guidelines for interpretation of income statement:

The analysis and interpretation of income statement will involve the followings steps: 

1. The increase and decrease in sales should be compared with the increase and decrease in the cost of goods sold. An increase in sales will not always mean an increase in profit. The profitability will improve if the increase in sales is more than the increase in the cost of goods sold. The amount of gross profit should be studied in the first step. 

2. The second step of analysis should be the study of operational profits. The opening expenses such as office and administrative expenses, selling and distribution expenses should be deducted from gross profit to find out operating profits. An increase in operating profits will result from the increase in a sales position and control of operating expenses. A decrease in operating profit may be due to an increase in operating expenses or a decrease in sales. The change in individual expenses should also be studied. Some expenses may increase due to the expansion of business activities while others may go up due to managerial inefficiency.

 3. The increase or decrease in net profit will give an idea about the overall profitability of the concern. Non operating expenses such as interest paid, losses from the sale of assets, written off of deferred expenses, payment of tax, etc. decrease the figure of operating profit. When all non-operating expenses are deducted from operational profit, we get a figure of net profit. Some non-operating incomes may also be there which will increase net profit. An increase in net profit will give us an idea about the progress of the concern. 

4. An opinion should be formed about the profitability of the concern and it should be given at the end. It should be mentioned whether the overall profitability is good or not.