Ch4_Class_Outline

Ch4_Class_Outline - Chapter 4 Chapter 4 Income Statement...

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Chapter 4 Page 1 of 14 Chapter 4: Income Statement and Related Information (REMEMBER: ALWAYS put headings on your financial statements, especially during the EXAMS. Points are subtracted if the financial statements do not list the company name, financial statement, date/time period. Also, ALWAYS date your journal entries.) The purpose of this chapter is to examine the different types of revenues, expenses, gains, and losses that affect the income statement and related information. 1) Income Statement : Report that measures the success of enterprise operations for a given period of time. Provides investors and creditors with info that helps them predict the amounts, timing, and uncertainty of future cash flows. (Objective #2 in our Basic Objectives from Chapters 1 and 2.) a Usefulness of the Income Statement : Income information is useful for: i) ii) iii) 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. b Limitations of the Income Statement : Net Income is an _________________ that reflects assumptions made. Users should be aware of its limitations. i) Items that cannot be measured reliably are not reported in the income statement. For example: (1) (2) ii) iii) c Quality of Earnings : If managers are focused on meeting financial targets, such as analysts’ forecasts to the detriment of good business practices, the quality of earnings and the quality of financial reporting will erode.
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Chapter 4 Page 2 of 14 Earnings management : It has a negative effect on earnings quality if it distorts the information that makes the current year (1) misrepresentative of a company’s true state and (2) less useful for predicting future earnings and cash flow. 2) Format of the Income Statement : Transaction approach : focuses on the income-related activities that have occurred during the period. That is, net income results from revenue, expense, gain, and loss transactions. ( Capital maintenance approach is the most common alternative. Here, income for the period is determined based on change in equity, after adjusting for investments by owners or dividends. However, the components of income are not evident in the capital maintenance approach.) a Elements of the Income Statement : i) Revenues : ii) Expenses : iii) Gains : iv) Losses : v) Gains and Losses : Some examples: b Single-Step Income Statement : LN : Aggregate Data. i) Just two groupings exist: _________________________________________ The single step is subtracting ______________________________________. Sometimes income tax is reported as the last item before net income (to show its relationship to income before income tax.) Example on page 130.
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Chapter 4 Page 3 of 14 ii) Example Format: SINGLE STEP FORM : Company Name Income Statement For the Year Ended 12/31/xx Revenues and Gains: Net Sales xx Other Revenue (e.g., Interest, Dividend revenue, Rent) xx Total Revenues and Gains:
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This note was uploaded on 09/28/2010 for the course ADD 123 taught by Professor Abdar during the Spring '09 term at Abu Dhabi University.

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Ch4_Class_Outline - Chapter 4 Chapter 4 Income Statement...

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