Lecture10 - FNA 1002X Lecture 10 Income Statement FNA 1002X...

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FNA 1002X Semester 1, 07/08 Adapted by Dr. Edmund Keung 1 FNA 1002X Lecture 10 Income Statement
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FNA 1002X Semester 1, 07/08 Adapted by Dr. Edmund Keung 2 Learning Objectives z To understand the presentation of an income statement } single- and multiple-step income statements } discontinued operations } calculation of EPS z To understand the nature of capital reserves z To understand the directors’ and the auditors’ responsibilities for the financial statements
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FNA 1002X Semester 1, 07/08 Adapted by Dr. Edmund Keung 3 Usefulness of the Income Statement z Evaluate past performance z Predict future performance z Assess the risks and the timing of future cash flows
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FNA 1002X Semester 1, 07/08 Adapted by Dr. Edmund Keung 4 Nature of Income Items z Recurring/nonrecurring } whether earnings can be expected to repeat in the future z Primary/peripheral } how closely earnings are related to the core activities of the firm
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FNA 1002X Semester 1, 07/08 Adapted by Dr. Edmund Keung 5 Nature of Income Items Creation and sale of firm’s regular products Income from sales of product or lines of business that the firm intends to discontinue Periodic sales of equipment previously used in manufacturing Losses from volcano eruption Peripheral to primary operating activity Primary operating activity Recurring Nonrecurring
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FNA 1002X Semester 1, 07/08 Adapted by Dr. Edmund Keung 6 Elements of the Income Statement z Revenues } inflows or other enhancements of assets or settlements of its liabilities that constitute the entity’s ongoing major or central operations z Examples of revenues: } sales } fees } interest } dividend } rent
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FNA 1002X Semester 1, 07/08 Adapted by Dr. Edmund Keung 7 Elements of the Income Statement z Expenses } outflows or other using-up of assets or incurrence of liabilities that constitute the entity’s ongoing major or central operations z Examples of expenses } cost of goods sold } depreciation } salary } interest
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FNA 1002X Semester 1, 07/08 Adapted by Dr. Edmund Keung 8 Elements of the Income Statement z Gains } increases in equity (net assets) from peripheral or incidental transactions. z Losses } decreases in equity (net assets) from peripheral or incidental transactions z Gains and losses can result from } sale of investments or plant assets } settlement of liabilities } write-offs of assets
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FNA 1002X Semester 1, 07/08 Adapted by Dr. Edmund Keung 9 Revenue Recognition z Revenues are “recognized” (recorded) as soon as they are both: } earned, meaning the seller has performed a service or conveyed an asset to the buyer; and } measurable, meaning the value to be received for that service or asset is reasonably assured and can be measured with a high degree of reliability
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FNA 1002X Semester 1, 07/08 Adapted by Dr. Edmund Keung 10 The Matching Principle z The assets “used up” (expenses) to produce revenues are recorded in the same accounting period in which the revenues are recognized } expenses are “matched” to revenues } unexpired costs remain on the balance sheet as assets (for example: prepaid expenses) z Net income = Revenues - Expenses
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Lecture10 - FNA 1002X Lecture 10 Income Statement FNA 1002X...

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