WFU Law School
Law & Valuation
3.2 Balance Sheet

3.3 Income Statement

The income statement is the principal source for information in valuing a business. Estimates of future earnings, derived from income statements, provide a surrogate for "cash flows" in the DCF model. Valuators then capitalize these earnings - a time-honored method for valuing a business.

3.3.1 - Income statement items

While the balance sheet constitutes a financial "snapshot" at a given point in time (such as December 31), the income statement summarizes a financial "movie" of operational results over a period of time (such as for the year ending December 31). It shows performance -- the company's revenues minus expenses equal net income. (More 3.3.1>>)

3.3.2 - Income statement analysis

For most analytic purposes, information about past earnings and prospects of future earnings is more useful than information about property and assets. An old axiom is that assets are worth only what they can earn. Assets that have no earning capacity are salable only for scrap. Hence, more reliance is usually placed on the income statement ratios compared to the balance sheet ratios. Sometimes "income statement ratios" actually compare items on the income statement and the balance sheet. (More 3.3.2>>)

3.3.3 - Statement of cash flows

The statement of cash flows covers the same period as the income statement it accompanies and shows from what sources the company received its cash flow (which is net income plus an add-back of depreciation and other non-cash charges that were subtracted from the company's revenues when calculating its net income.) (More 3.3.3>>)

Chapter Subsections

 

3.2 Balance Sheet

©2003 Professor Alan R. Palmiter

This page was last updated on: March 21, 2004