Income Statement Analysis

The income statement shows the entity's financial performance for the month or year. In evaluating the statement, consider whether performance was as good as it should have been, and if not, why is this.

To determine how well your entity did for the month, compare actual performance with some indication of how the entity should have performed. The best basis for comparison usually is a budget. A carefully thought-out budget indicates your judgment of what the entity's income should be, based on all the information available at the time you prepared it. Examine each revenue and expense item. Investigate any significant difference, or variance, between budgeted and actual amounts.

If you collect revenue and direct expenses by "departments" - which can include product lines, physically separate subunits, or any other useful way of subdividing revenues - you can pinpoint the source of the variances even more closely.

In addition to a comparison with budgeted amounts, you can compare revenue and expense amounts for the current month with those for the preceding month or for the same month a year ago. Also, a comparison of results for the year to date with the budget, or with results in the preceding year to date can be useful because it tends to average out temporary influences distorting the results for a given month.