Lecture+Note+chapter+4+with+answers

Lecture+Note+chapter+4+with+answers - Chapter 4: Reporting...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 4: Reporting financial performance In-class exercises:E4-6, E4-16, E4-17, P4-14 Practice exercises:P4-3, P4-4, P4-8, P4-13, P4-15 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
USES OF THE I/S - evaluate mgt performance & firm performance during period - helps in predicting future cash flows of firm - helps in assessing risk of firm LIMITATIONS OF THE I/S - must use estimates eg in estimating bad debt exp - doesn’t show all changes in value in firm because we wait for transaction with outside party before recording revenue - items are omitted because we can’t measure them with enough certainty - variations allowed under GAAP make it hard to compare across firms 2
Background image of page 2
QUALITY OF EARNINGS WHAT DO WE MEAN BY THE TERM “QUALITY OF EARNINGS”? WHAT FACTORS WOULD YOU CONSIDER IN ASSESSING THE “QUALITY OF EARNINGS” OF A FIRM? ie. what causes one firm’s earnings to be “higher quality” than another? - economic environment in which firm operates (sound business) - credibility of company compared to its former performance & other similar companies - most inc is from continuing operations (recurring) - high correlation between inc & cash flows from operations - conservative choice in actg policies & estimates - reliability of earnings – auditor’s report, unbiased, verifiable, representational faithfulness of earnings - earnings are not managed to achieve a certain result - 3
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
ITEMS ON THE I/S 1. EXTRAORDINARY ITEMS Definition: HAS ALL 3 CHARACTERISTICS : Infrequent (nonrecurring) Unusual Not as a result of mgt decision (ie. Mgt could not have predicted) Treatment: - reported in a special section of I/S, after income from continuing operations & after income from discontinued items - reported net of their tax effect - must report effect of EI on EPS 4
Background image of page 4
2.UNUSUAL ITEMS Definition: Don’t meet all of the conditions for EI (in particular, don’t usually meet the last condition) Treatment: - included in income from continuing operations - NOT shown net of tax - Do not disclose effect on EPS 5
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
3. DISCONTINUED OPERATIONS Definition of a business component : can identify its financial elements, operations & cash flows separately from rest of firm may be reportable segment, reporting unit, subsidiary or asset group Definition of discontinued operations: Has either been: - disposed of OR - designated as held for sale (some action taken to sell it, it is likely to be sold within 1 yr, authorized plan to sell, available for sale, reasonable selling price, changes to plan unlikely) Treatment: Report net of tax Report 2 components: (1) rev & exp of discon’d operation during this period; (2) gain or loss on sale Show impact on EPS No more amortization of assets (disclose separately on B/S) 6
Background image of page 6
4.CHANGES IN ACCOUNTING ESTIMATES Examples: Eg. Change in estimate of useful life of asset, change in estimate of uncollectible accts
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 34

Lecture+Note+chapter+4+with+answers - Chapter 4: Reporting...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online