An income statement is one of the key financial statements, including a balance sheet and a cash-flow statement, that are reviewed by stockholders in order to understand the financial position of a selected company. Therefore, income statements include such sections as sales or revenues, costs, expenses, and net income. These data allow investors to understand what particular revenues a company has in comparison to regular expenses in order to conclude regarding a firm’s profitability (Epstein, 2014). This paper is aimed at presenting the purpose of an income statement, discussing points to be used by analysts, and assessing the financial condition of Ford Motor Company with reference to the information in the income statement.
Purpose of the Income Statement
The purpose of income statements is to present data regarding a company’s revenues and expenses with a focus on net profits. This detailed presentation of the earnings performance is often used by stockholders in order to decide on further investments with reference to the analysis of a firm’s profits and losses. A company’s net income as a difference between revenues and expenses is of critical importance for reviewers in order to conclude regarding an organization’s profitability and determine its financial position in the industry or market (Danguolė et al., 2017).
From this perspective, referring to the income statement, it is possible to assess a company’s ability to generate profits and cover losses. The goal of any company is to increase the amount of the net income in order to become more attractive to investors (Stašević & Stavanović, 2019). Therefore, the lines in the income statement regarding a firm’s net losses and profits are used to illustrate its financial status.
Points to Assess the Financial Condition of a Company
In order to be able to assess the financial position of any company with reference to the information provided in the income statement, an analyst can apply the common-size analysis of the income statement and the ratio analysis. When using the common-size analysis, an analyst should focus on the following points: the comparison of profits referring to different time periods or the comparison of profits focusing on industry averages (Epstein, 2014). The main principle of this common-size analysis is to represent the elements of lines in the income statements as percentages of revenues to understand the key sources of revenues and expenses. Referring to this principle, it is also possible to conduct the vertical analysis of the income statement.
An alternative approach to assessing the financial condition of a company with reference to the income statement is conducting a ratio analysis. The main ratios in this context are the profit margin and the gross profit margin, as well as earnings per share (Epstein, 2014). The analysis of these ratios allows for concluding regarding a firm’s profitability. Therefore, analysts often apply the ratio analysis when their task is to decide on investments and predict returns for shareholders (Stašević & Stavanović, 2019). In addition, these ratios can also be used in order to compare the performance of different companies in one industry to select the most profitable firm.
Analysis of Ford Motor Company’s Income Statement
It is important to analyze the profitability of Ford Motor Company with the help of focusing on the advantages of the ratio analysis. Thus, the profit margin is calculated by dividing the company’s net income after tax by its net sales, and it is used to demonstrate how much money is generated by a company with reference to sales. For Ford Motor Company, the profit margin equals $5,664 / $134,252 = 0.04 = 4% (Ford Motor Company, 2012). From this perspective, in 2012, Ford Motor Company had the net income in 4 cents for each generated dollar.
The gross profit margin is calculated when dividing the gross profit by the company’s net sales in order to determine how much revenue is available in the company for generating profits and reinvestment. The gross profit margin of Ford Motor Company in 2012 was equal to $21,674 / $134,252 = 0.16 = 16% (Ford Motor Company, 2012).
Earnings per share are viewed as another important ratio that is calculated when dividing the company’s profit by shares of the firm’s common stock. In the case of Ford Motor Company, this ratio is $1.41, which is rather low in comparison to the industry’s averages (Ford Motor Company, 2012). The reference to earnings per share helps potential shareholders to decide whether it is necessary to purchase these stocks of the firm when comparing prices and potential earnings with other actors in the industry.
Conclusion
The analysis of income statements provides reviewers and analysts with the most important information regarding a firm’s profitability. These data are usually critical for investors and stockholders who decide on the distribution of their resources. The examination of the ratios illustrating the income statement data is of critical importance for evaluators because this information allows for interpreting the income statement lines. Information retrieved from the income statements adds to the data collected with the help of the balance sheet and the cash-flow statement. The evaluation of all these financial details allows for concluding regarding the financial position of a firm.
References
- Danguolė, Š., Petrošienė, B., & Aušra, G. (2017). The importance of financial statement results for business management solutions. Humanities Bulletin of Zaporizhzhe State Engineering Academy, 71, 172-178.
- Epstein, L. (2014). Financial decision making: An introduction to financial reports. Bridgepoint Education, Inc.
- Ford Motor Company. (2012). Profitable growth for all: Ford Motor Company 2012 Annual report. Web.
- Stašević, N., & Stavanović, S. (2019). Creative accounting in income statement: The case of entrepreneurs in Serbia. JWEE, 3-4, 17-32.