The Bottom Line on Income Statements

Now that most companies have filed their Form 10-Qs for the first quarter, it's time to keep working on the mini-audit of your favorite stock.

We tackled the balance sheet a few weeks ago, so now we're ready to hit the income statement.

The income statement adds up all of the company's revenue, subtracts its expenses and gives you the bottom line -- a.k.a. net income. It helps you determine if your company is making money selling its products or services. You can use it to evaluate past performance and potentially predict its future.

At the same time, you'll find a lot of "creative accounting" on the income statement. Over the years, there have been two basic types of fraud, notes Ed Ketz, associate accounting professor at Penn State University. Fictitiously beefing up revenues and falsely decreasing expenses are the biggies. Either tactic increases the bottom line, so you can spot them on the income statement.

So we'll walk you through the hot spots. This is pretty dense stuff, so grab your coffee/Red Bull and let's get started!

Sell! Sell! Sell!

Start with the revenue number, the first line on the statement (hence why the figure is sometimes colloquially called the "top line"). Revenue represents the total money the company collected for any goods sold and/or services performed.

From there, if you subtract sales discounts, returned products and allowances for sales made on credit that aren't getting paid, you end up with the net revenue.

We mentioned above that beefing up revenue is a favorite tactic for crooked CEOs, and they do it in a few ways. It can be blatant, where the company just books fictitious sales in efforts to pump up revenue. Or it can be a bit more subtle by, say, recording sales too quickly. For instance, most companies consider an item a sale at the time of shipment. But some take a more assertive stance and claim the item is sold at the time of production. Their logic is that once the good is produced, it's sellable, so that should be revenue.

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