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Main_ideas_in_CH_4_Handout

Main_ideas_in_CH_4_Handout - MAIN IDEAS IN CH 4 HANDOUT...

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MAIN IDEAS IN CH 4 HANDOUT INCOME STATEMENT AND RELATED INFORMATION (NOTE: Handouts are not a substitute for reading and studying the text. Handouts do not cover everything that you need to know.) 1. The main ideas you should learn in this chapter include the following: 1. (L01) Understand the uses and limitations of an income statement. 2. (L03) Prepare a multiple-step income statement. 3. (LO4) Explain how to report irregular items. 4. (L06) Identify where to report earnings per share information. 5. (LO7) Prepare a retained earnings statement. 6. LO8) Explain how to report other comprehensive income. 1. (L01) Understand the uses and limitations of an income statement. CH 4 focuses on the income statement, its conceptual underpinning, and the technical aspect of how its many pieces are put  together.  The income statement is a critical piece of a company’s financial story because it communicates earnings for the  accounting period.  It provides a financial picture of how well a company carried out its operating activities to earn a profit for  the business.   Consider the following questions:  (1) Stock prices rise as earnings expectations rise; stock prices fall as earnings expectations  fall.  Why do investors, creditors, and WALL STREET focus on earnings? [APPENDIX 1] (2) Why is the following statement  true?  “The ability of a firm to generate earnings is essential for its long-run survival.” (3) How does the income statement  support the objectives of financial reporting (decision usefulness) as set forth in SFAC 1? 1    We can examine all of these  questions by consider why the income statement is useful. USEFULNESS OF THE INCOME STATEMENT We can describe the usefulness of an income statement, in light of the questions raised above, into three principal areas: EVALUATE THE PAST PERFORMANCE OF THE COMPANY :     The   income   statement   reports   profitability for a  period  that has  past.   It reports  revenues  and  expens e s  and  allows  for comparison   (becaus e  of the  comparability and  consistency  attributes  of accounting)  to a  company’s  other  results   and  trends,  to  other  companies  in  the  same   business  or   industry,  or  other  companies   in  general.   Investors  and  creditors  have  choices  about  where  to  put  their  resources.        The  income  statement   provides  information  to evaluate  these  choices.  It’s relevant  becaus e  it provides  “feedback  value”  on   PROVIDE A BASIS FOR PREDICTING FUTURE PERFORMANCE :    It only  makes  sense  that past  
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