The Finance Professor

The Finance Professor: How to Read an Income Statement

05/21/07 - 04:04 PM EDT


The most recent installment of the Finance Professor kicked off our look at how to start analyzing the financial statements of public companies public-company. We covered where to locate a company's financial information and reports, and what to look for once you find this data. Now we're going to take the next step in this series of lessons and focus in on how to read a company's income statement (or profit and loss statement, the P&L).

Mind the GAAP

Income statements will vary from company to company and industry to industry. As such, the statement might seem like one big salad of information that we must learn how to sift through to better understand a company's operating results. However, there is one constant that always guides us in the preparation and understanding of financial statements such as the income statement. This constant is the application of generally accepted accounting principles, or GAAP.

GAAP is a standard that must be followed by all companies (public and private) in order to receive the unqualified independent auditor's report audit that I discussed last time. We rely on the auditor's report to confirm a company's adherence to GAAP or alert us as to the deficiencies of its financial statements in terms of accounting standards. Accounting standards are quite complex and in the United States are the responsibility of the Financial Accounting Standards Board (FASB). For the individual investor, it is more important to be assured that the company you hold in your portfolio is in compliance with GAAP than to understand the intricacies of the accounting standards.

A Look at McDonald's

With the aforementioned in mind, I will start by using a rather simple form of income statement from a company that I know quite well: McDonald's MCD. Below, I have included a copy of McDonald's income statement, which I extracted from the company's 2006 annual 10-K:


McDonald's Corp.(MCD)
Click here for larger image.
Source: McDonald's Corp.

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At the time of publication, Rothbort was long BJ, C, CVS, MCD, and MER (with calls), although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.


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