lec3 - 1 Income Statement: Results of Operating Performance...

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Unformatted text preview: 1 Income Statement: Results of Operating Performance 15.511 Corporate Accounting Summer 2004 Professor SP Kothari Sloan School of Management Massachusetts Institute of Technology June 10, 2004 2 Chapter 3: Income Statement Accounting in a one-period world- Cash + Cash Invested Returned 0 1 Example: Shipping Expeditions in the 15th Century Ship sold at the end of a voyage: Finite project life No information flow from time ship left port until it returned Performance: Discounted Cash Flow (DCF) 3 Accounting in a multi-period world Cash Invested 0 1 2 3 4 5 6 Cash Returned No pre-determined end to a firm's life - going concern Cash invested and generated at multiple points in time Subsequent actions affected by prior results - feedback 4 Principles in Preparing Financial Statements: Fiscal Period Artificially divide the life of an organization into annual periods for the purpose of financial reporting. SEC requires quarterly reporting. Internationally, trend toward quarterly reporting Why is there a demand for periodic performance measures? Valuation Evaluate management performance Reward management Decide whether to continue to trust the firms assets with the current management Ideally, all the relevant information with respect to a firms performance should be in the quarterly report on a timely basis. Is that the case? 5 Financial Accounting Principles: Objectivity and Conservatism Objectivity : financial accounting information must be verifiable and reliable. Conservatism Asymmetry in the treatment of gains and losses Greater degree of verification for gains than for losses Required by GAAP, but arose voluntarily. Why? Managements incentive to report good information, hide bad information Asymmetric payoff to bondholders Credibility of information in valuation Conservatism does not suggest that financial statements should arbitrarily understate assets and overstate liabilities. 6 Income Statement: Results of Operating Performance Revenues -- Sales or service revenue Gains -- e.g., selling an equipment for cash greater than its net book value Expenses -- Cost of goods sold, operating expenses, etc....
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This note was uploaded on 04/05/2010 for the course FINANCE AN FRE6003 taught by Professor Marshall,ingridm during the Spring '09 term at NYU Poly.

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lec3 - 1 Income Statement: Results of Operating Performance...

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