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CH 4 - Class Notes


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CHAPTER 4 REPORTING FINANCIAL PERFORMANCE FINANCIAL REPORTING : Business model identifies 3 activities Financing = obtaining cash funding Investing = use of funding to obtain resources Operating = use of resources to generate profits Financial statements should capture these fundamental business activities Balance Sheet = reports financing + investing activities Income Statement = reports operating + performance related activities Statement of Cash Flows = reports interrelationship between all 3 activities USES + LIMITATIONS OF THE INCOME STATEMENT : USES LIMITATIONS Evaluate past performance + profitability (historical) Assist in predicting future performance Assess potential risk or uncertainty in achieving future cash flows Items are excluded if they cannot be measured reliably Amounts reported affected by account- ing methods used Use of estimates in measuring income Estimates are not entirely accurate = room for error Different accounting methods = can result in different Net Incomes for the same company. Should be aware of this QUALITY OF EARNINGS : The reliability of the information presented dependent of the quality of earnings Characteristics of High Quality Earnings: Nature of Content: Unbiased + determined objectively Represents economic reality Reflects earnings from ongoing operations Can be correlated with cash flows from operations Based on sound business strategy/model Presentation: Does not disguise or mislead ( transparent ) Information presented is understandable Information is clear + concise MINIMUM DISCLOSURE : (Survey of IS Parag 1520.03) Revenue Recognition (aka Top Line) = Disclosing the income
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Is the fuel to earnings = if revenue isn’t there then they are likely going to have to report a loss Income from Investments = fluctuates depending on the investments that you make that year Finance Income from direct Financing or Sales-Type Leases Income from Operating Leases Government Assistant Credited Direct to Income These assistance programs are given to little companies, but when they are bought out by big companies these credits disappear Therefore it is important that these items be listed separated on the income statement so that it can be easily calculated without Amortization Goodwill Impairment Losses = except for losses associated with discontinued operations that are included in the results of discontinued operations (double re- corded otherwise) Amortization of Property Under a Capital Lease = the amount should be dis- closed separately or as part of amortization expense for property, plant + equip- ment Amount Charged for Amortization of Deferred Charges = except the amortiza- tion of debt discount + issue expenses included with interest expense.
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