ADMS 3585 Chapter 4 Study Sheet.docx

ADMS 3585 Chapter 4 Study Sheet.docx - ADMS 3585 Chapter 4...

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ADMS 3585 Chapter 4 Study Sheet Business Model identifies three activities: 1. Financing Obtaining cash funding 2. Investing Use of funding to buy assets and invest in people 3. Operating Use of assets and people to generate profits Financial statements should capture these fundamental business activities Income Statement helps users: 1) Evaluate past performance and profitability 2) Assist in predicting future performance a) (Income from Continuing Operations vs. Income from Discontinued Operations) 3) Assess potential risk or uncertainty in achieving future net cash inflows (pp. 256-257) Statement of income/comprehensive income has the following limitations: o Items are excluded if they cannot be measured reliably (e.g., contingent gains.) o Amounts reported are affected by accounting methods used o Use of estimates in measuring income o Financial reporting bias o GAAP shortcomings (Off-Balance Sheet Financing)
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Quality of earnings refers to how solid earnings numbers are o Two main aspects to consider (P. 162): o Content Integrity of information Sustainability of earnings o Presentation Earnings presentation is clear and concise Easy to use and understandable Characteristics of high quality earnings: o Nature of Content Unbiased and determined objectively Represents economic reality Reflects earnings from on-going core activities Can be correlated with cash flows from operations Based on sound business strategy/model o Presentation
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