When an analyst uses the income statement method of forecasting earnings, she has a limited amount of flexibility in adjusting the inputs.

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There is a lot of flexibility. A more process-oriented method of forecasting earnings is to start with a sales forecast and create a standardized set of financial statements based on historical relationships. This method can be involved. Several important factors are included in this method of forecasting, such as profitability, the resultant fluctuations in profit margins before and after taxes, short-term interest rates, and any new bond financing, as well as any increase in shares of common stock from new equity financing.

When an Analyst Uses the Income Statement Method of Forecasting