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Chapter_4_Lecture - Chapter 4 Lecture LECTURE The following...

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Chapter 4 Lecture LECTURE The following three areas is going to be of our concentration: (1) An understanding of the concepts underlying the measurement and presentation of income. These include concepts such as the capital maintenance approach, the quality of earnings, the all-inclusive approach versus the current operating performance approach, etc. (2) An understanding of each of the intermediate components of income and other irregular items, including prior period adjustments, extraordinary items, changes in accounting principle, etc. You should be all able to: (1) recognize these items when encountered in problem material, and (2) identify the proper accounting and disclosure procedure for each of them. (3) An understanding of proper format for income (including comprehensive income) and retained earnings statements. Given transaction data or account balances, you should be able to prepare single- and multiple- step income statements, retained earnings statements, combined statements of income and retained earnings, comprehensive income statements, combined statements of comprehensive income, and statements of stockholders’ equity. A. The Relative Importance of the Income Statement as Providing a Measure of Profit. 1. Income information helps interested parties predict the amount, timing, and uncertainty of future cash flows. Income information is useful: a. for evaluating past performance b. for determining the risk (uncertainty) of achieving future cash flows . Information about the various components of income— revenues, expenses, gains, and losses—is helpful for assessing the likelihood that particular cash flows will continue in the future. c. for predicting future performance 2. There is major attention focused on a firm's earnings.
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B. Limitations of the Income Statement. 1. Items that cannot be measured reliably are not reported in the income statement. For example: a. Unrealized gains and losses on certain investment securities. b. The value of brand recognition, customer service, and quality. 2. Income numbers are affected by the accounting method used. I like to brief you on the concept of the quality of earnings. The quality of earnings refers to how closely income is correlated with cash flows--- The higher the correlation is higher the quality of the earning. A comparison of net income with cash generated from operating activities may provide information for assessing the quality of earnings. C. Concepts of Income Measurement. 1. Let’s review concepts such as revenue recognition, matching, periodicity. Professional judgment is often necessary to make determination on the quality of income. The realization principle establishes criteria for recognizing revenue and income. While these criteria are met at the point of sale, they sometimes are met before a sale occurs or even after a sale occurs. The amount of revenue and income is ultimately recognized is the same under all of the revenue recognition methods. Matching principle means that revenues generated and expenses incurred in
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Chapter_4_Lecture - Chapter 4 Lecture LECTURE The following...

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