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ACCT 327 Chp 4 - IncomeStatement: givenperiodoftime o o o

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Accounting 327 Chapter 4 Income Statement: the report that measures the success of company operations for a  given period of time Uses of the Income Statement: o Evaluate the past performance of the company o Provide a basis for predicting future performance o Help assess the risk or uncertainty of achieving future cash flows Limitations of the Income Statement:  o Companies omit items from the income statement that they cannon measure  reliably o Income numbers are affected by the accounting methods employed o Income measurement involves judgement Earnings Management: the planned timing of revenues, expenses, gains, and losses to  smooth out bumps in earnings  o Companies use management to increase income in the current year at the  expense of income in future years. Companies also use earnings management to  decrease current earnings in order to increase income in the future o “cookie jar” reserves: established by using unrealistic assumptions to estimate  liabilities for such items as loan losses, restructuring charges, and warranty  returns.  The companies then reduce these reserves in the future to increase  reported income in the future. o Such earnings management negatively effects the quality of earnings if it distorts  the info in a way that is less useful for predicting future earnings and cash flows Transaction Approach: focuses on the income-related activities that have occurred  during the period.
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Most decision makers find the parts of a financial statement to be more useful that the  whole  Single-Step Income Statement: format that most companies use o Consists of two groupings: revenues and expenses o The primary advantage of the single-step format lies in its simple presentation  and the absence of any implication that one type of revenue or expense item has  priority over another Multiple-Step Income Statement: recognizes (1) a separation of operating and  nonoperating activities of the company, and (2) a classification of expenses by functions,  such as merchandising, selling, and administration Income Statement Sections: o Operating Section: revenues and expenses of the principal operations Sales or Revenues Section: a subsection presenting sales, discounts,  allowances, returns, and other related info. Purpose is to arrive at the net  amount of sales revenue Cost of Goods Sold Section: shows the cost of goods that were sold to  produce the sales Selling Expenses: lists expenses resulting from the company’s effort to  make sales
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