Kathryn F. Staley, an investment analyst specializing in short selling, wasn't surprised. He had been investing assets in stocks and other securities rather than funneling them into research and development and other endeavors that would enhance growth. As that example illustrates, companies can easily manipulate their income statements to make the overall picture look rosier than it really is. So it's crucial for investors to look not only at the bottom line but at all the lines on the income statement that show how a company got there. The income statement identifies the company's major sources of revenue and expenses, as well as income taxes, and it sums things up on the line labeled Net Earnings or Net Income.
Revenue is generated from products, services, and investments.
Extraordinary items, such as onetime charges for making acquisitions, are also noted. Finally, the statement breaks out earnings per share and dividends paid. The single most important bit of information one should glean from the income statement is the quality of a firm's earnings. For instance, if net income is soaring but cash flow isn't, you should be concerned. Before IBM's stock collapsed in the early 1990s, its former chief independent auditor, Donald Chandler, had accused Big Blue of pumping up net income by logging orders as sales before they were actually recognized.