ch 4 Income statement

ch 4 Income statement - 4-1Ch 4 Income StatementLearning...

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Unformatted text preview: 4-1Ch 4 Income StatementLearning Objectives1.Define the concept of income.2.Explain why an income measure is important.3.Explain how income is measured, including the revenue recognition and expense-matching concepts.4.Understand the format of an income statement.5.Describe the specific components of an income statement.6.Compute comprehensive income and prepare a statement of stockholders’ equity.7.Construct simple forecasts of income for future periods.4-2OBJECTIVE 1The financial capital maintenance concept assumes that a company has income “only if the dollar amount of an enterprise’s net assets at the end of the period exceeds the dollar amount of net assets at the beginning of the period after excluding the effects of transactions with owners.Define the concept of income.4-3Beginning of PeriodEnd of PeriodTotal assets$510,000$560,000Total liabilities430,000390,000Net assets(owners’ equity)$ 80,000$170,000Income is $90,000(=$170,000 - $80,000).Financial Capital MaintenanceKreidler, Inc. had the following assets and liabilities at the beginning and at the end of a period.4-4Net assets, end of period$170,000 Net assets, beginning of period80,000Change (increase) in net assets$ 90,000 Deduct investment by owners(40,000)Add dividends to owners15,000Income$ 65,000 Financial Capital MaintenanceIf the owners invested $40,000 in the business and received dividends of $15,000, what would be the income?4-5Physical Capital Maintenance•Results only if production capacity at the end of the period exceeds capacity at the beginning of the period.•Capacity is measured by replacement cost of net assets.•Income/loss is the difference between replacement cost and net realizable value.•Difference between historical cost and replacement cost is considered a capital maintenance adjustment and not part of income.Income per physical capital maintenance:4-6OBJECTIVE 2The recognition, measurement, and reporting of business income and its components are considered by many to be the most important tasks of accountants. For example:•Has the activity been profitable?•What is the trend of profitability?•Is it increasing profitable, or is there a downward trend?Explain why is a Measure of Income Important.4-7Explain how income is measured, including the revenue recognition and expense-matching concepts.OBJECTIVE 3Transaction Approach: To provide detail concerning the components of income, accountants have adopted a transaction approach to measuring income that stresses the direct computation of revenues and expenses. It–yields the same net income number as financial capital maintenance –is also known as the matching method.4-8...
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This note was uploaded on 12/07/2009 for the course ACCT ACCT 203 taught by Professor Kim during the Fall '09 term at HKUST.

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ch 4 Income statement - 4-1Ch 4 Income StatementLearning...

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