Intermediate Accounting

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4 The Income Statement Overview To some, the income statement is the most important financial statement. To virtually all users, it remains one of the two most important, along with the balance sheet. Hence, understanding what goes into it, and how, is of vital importance not only in your understanding of this chapter but for later chapters as well. Revenue (and expense) recognition is a significant concept both in this chapter and in practice these days. A number of accounting scandals have included improper recognition. (This topic is covered in more detail in Chapter 6.) Comprehending how, and why, recognition should occur when it does, according to GAAP, will help in enabling you to decide proper accounting treatment for the wide variety of possible transactions that can occur in the real world. Income statements are not as simple as revenues minus expenses. There are specific components that break up the various revenues and expenses into certain classifications to provide additional information to users for easier analysis. Those components include not only the separate classification of cost of goods sold from operating expenses but also the separately stated, or below-the-line, items known as discontinued operations and extraordinary items. The details of these matters were probably not gone over (at least in any degree of detail) in your introductory financial accounting course. Comprehensive income is another topic that may also be totally, or mostly, new to you. Learning Objectives Refer to the Review of Learning Objectives at the end of the chapter. It is crucial that this section of the chapter is second nature to you before you attempt the homework, a quiz, or exam. This important piece of the chapter serves as your CliffsNotes or “cheat sheet” to the basic concepts and principles that must be mastered.
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4-2 Chapter 4 If after reading this section of this chapter you still don’t feel comfortable with all of the Learning Objectives covered, you will need to spend additional time and effort reviewing those concepts you are struggling with. The following “Tips, Hints, and Things to Remember” are organized according to the Learning Objectives (LOs) in the chapter and should be gone over after reading each of the LOs in the textbook. Tips, Hints, and Things to Remember LO1 – Define the concept of income. How? What is the difference between financial and physical capital maintenance? First of all, it is easy to remember the system in use since it is the same word as the term usually used to describe accounting for external users— financial or financial accounting. The difference between financial and physical is primarily related to the use of historical or current cost. If you remember back to LO5 in Chapter 1, you’ll know that financial accounting uses various measurements of costs/values. For many companies, the primary measurement is historical cost (since things like inventory, and property, plant, and equipment can frequently make up the bulk of the assets on a balance
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032459237X_174363 - 4 The Income Statement Overview To...

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