CONCLUSION
At several points in this chapter, analysis of the income statement has posed questions that could be answered only by looking outside the statement.
Mere study of reported financial figures never leads to a fully informed judgment about the issuer. Financial statements cannot capture certain non- quantitative factors that may be essential to an evaluation. These include industry conditions, corporate culture, and management’s ability to anticipate and respond effectively to change.In a few applications of income statement analysis, the limitations of looking only at the reported numbers pose no difficulty. For example, an investment organization may be permitted to buy the bonds only of companies that meet a quantitative financial test such as a minimum ratio of earnings to interest expense. If the analyst’s task is narrowly defined as calculating the ratio to see whether it meets the guideline, then there is no need to go beyond the income statement itself. In most instances, however, the object of the analysis is to assess the company’s future financial performance. For analysts engaged in forward-looking tasks, poring over the income statement is merely the jumping-off point. Armed with an understanding of what happened in past periods, the analyst can approach the issuer and other sources to find out why.