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   incom e   statem ent   reports   profitability for  a  period  that has  past.    It reports  revenue s  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   sam e   busines s   or   industry,   or   other   companies   in   general.   Investors  and  creditors  have  choice s  about  where  to  put  their  resourc e s.        The  incom e  statem ent   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  sens e  that past   performanc e   provides   a   very   important   stepping   stone   to   determine   important   trends   that,   if 
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This note was uploaded on 05/07/2010 for the course ACCT 306 taught by Professor Intermediateaccounting during the Spring '10 term at Winthrop.

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Main_ideas_in_CH_4_Handout - MAIN IDEAS IN CH 4 HANDOUT...

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