ch04 - Chapter 4: Income Statement and Related Information...

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  Chapter 4 1 Chapter 4: Income Statement  and Related Information AIM 3331-0U1 Summer 2009 Xinyi Lu
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  Chapter 4 2 Today’s Tasks 1. Understand the uses and limitations of an income statement. 2. Explain the formats of income statement (single-step vs. multi-step). 3. Explain how to report irregular items. 4. Explain intraperiod tax allocation. 5. Identify where to report earnings per share information. 6. Prepare a retained earnings statement. 7. Explain how to report other comprehensive income.
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  Chapter 4 3 Income Statement “Income statement” or “Statement of income” or “Statement of earnings”. A report that measures a firm’s financial performance for a given period of time . It is desired because the ability of a firm to generate earnings is essential for its long-run survival. Potential Users: investors, creditors, customers, unions, government agencies, financial intermediaries, etc.
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  Chapter 4 4 Usefulness of the Income Statement The income statement information can help users to predict the amount , time and uncertainty of future cash flows . Specifically, it can: Evaluate firms’ past performance. Provide a basis for predicting future performance. Help assess the risk (level of uncertainty) of achieving future cash flows.
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  Chapter 4 5 Limitations of the Income Statement: 1 Items that cannot be measured reliably are not reported. Examples: a. Unrealized gains or losses on available-for-sale investments, b. Changes in the market values of long-term liabilities, such as bonds payable, c. Changes (increases) in value of property, plant and equipment, such as land, natural resources, or equipment, d. Changes (increases) in the values of intangible assets such as goodwill, brand value, or intellectual capital.
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  Chapter 4 6 Limitations of the Income Statement: 2 Income numbers are affected by the accounting methods employed. Examples: a. Inventory methods—LIFO vs. FIFO, b. Depreciation methods—straight-line vs. accelerated, c. Accounting for long-term contracts—percentage-of- completion vs. completed-contract.
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  Chapter 4 7 Limitations of the Income Statement: 3 Income measurement involves judgment . Examples: a. Estimates of useful lives or salvage values for depreciable assets, b. Estimates of bad debts write-offs, c. Estimates of warranty returns. These limitations reduce the usefulness of income statement information.
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Chapter 4 8 Earnings Quality Earnings attributes: accrual quality, persistence, predictability, smoothness, value relevance, timeliness, and conservatism, etc. Capital market value earnings quality. Generally, firms with high earnings quality experience low cost of capital. (“Costs of Equity and Earnings Attributes”, Francis et al., The Accounting Review 2004). Our textbook take the view that high quality
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This note was uploaded on 08/06/2009 for the course BUSINESS 4444 taught by Professor Dr.dale during the Spring '09 term at University of Texas at Dallas, Richardson.

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ch04 - Chapter 4: Income Statement and Related Information...

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