ch04student

ch04student - Chapter 4 Student Handout Limitations of the...

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1 Chapter 4 Student Handout Companies omit items that cannot be measured reliably. Income is affected by the accounting methods employed. Income measurement involves judgment. Limitations of the Income Statement
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2 Companies have incentives to manage income to meet or beat Wall Street expectations, so that the market price of stock increases and the value of stock options increase. Quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows. Quality of Earnings Expenses – Outflows or other using-up of assets or Outflows or other using-up of assets or incurrences of liabilities that constitute the entity incurrences of liabilities that constitute the entity ’s ongoing major or central operations. ongoing major or central operations. Cost of goods sold Depreciation expense Depreciation expense Interest expense Interest expense Rent expense Rent expense Salary expense Salary expense Examples of Expense Accounts
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3 Gains – Increases in equity (net assets) from Increases in equity (net assets) from peripheral or incidental transactions. peripheral or incidental transactions. Losses
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This note was uploaded on 09/06/2009 for the course BUS 311 taught by Professor Staff during the Spring '08 term at IUPUI.

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ch04student - Chapter 4 Student Handout Limitations of the...

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