Chapter_4 - Chapter 4 Reporting Financial Performance 1...

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1 Chapter 4 Reporting Financial Performance
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2 Business Activities Three types of activities Financing : borrow debts, issue stocks, etc. Investing : purchase assets, etc. Operating : sales, admin. expenses, etc. Purpose: maximize shareholder value
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3 Communication of Business Activities Business activities are communicated to users through financial reporting Balance Sheet : financing & investing activities Income Statement : operating activities Recall that Statement of Cash Flows is classified into three categories (operating, investing, and financing) based on the nature of activities
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4 Income Statement: How Useful Is It? Usefulness: Evaluate past performance and profitability Predict future performance Assess risk of achieving future cash flows Limitations: Incomplete: Items are excluded if they cannot be reliably measured Incomparable: Use of different accounting methods Inaccurate: Accounting estimates
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5 Quality of Earnings How to evaluate the quality of earnings? Content Information integrity Earnings sustainability Presentation Transparent Understandable Earning management/manipulation: Motivation Small losses can be manipulated into big profits (or big losses if management decided to take a big “bath”)
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6 Elements of the Income Statement Revenues and Gains Increasing shareholder’s equity Ordinary vs. incidental Expenses or Losses Decreasing shareholder’s equity Ordinary vs. incidental Other comprehensive income Part of comprehensive income but excluded from net income
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7 Single-Step Income Statement Example (pp. 148) Revenue Expense Net income before discontinued operations and extraordinary items Discontinued operations Net income before extraordinary items Extraordinary items Net income Simple but not as useful
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8 Multiple-Step Income Statement Continuing Operations
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