Accounting 312- ch 5 - Accounting 312 Chapter 5- Income...

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Accounting 312 Chapter 5- Income Statement and Related Information The INCOME STATEMENT is the report that measures the success of a company operations for a given period of time *used to determine profitability, investment value, creditworthiness *provides investors and creditors with info that helps them predict the amts, timing, and uncertainty of future cash flows Usefulness of the Income Statement 1. evaluation of past performance of the company (examine revenues and expenses) 2. provide a basis for predicting future performance 3. Help assess the risk or uncertainty of achieving future cash flows Limitations of the Income Statement 1. companies omit items from the income statement that the cannot measure reliably (brand recognition) 2. income numbers are affected by the accounting methods employed (one co may depreciate its plant assets on an accelerated basis while another chooses straight line, so the first co will report lower income) 3. income measurement involves judgment (useful life, bad debt write offs) Quality of Earnings -Companies have incentives to manage income to meet earnings targets or to make earnings look less risky -earnings management- planned timing of revenues, expenses, gains and losses to smooth out bumps in earnings- used to increase income in the current yr at the expense of income in future years or to decrease current earnings in order to increase income in the future *negatively affect the quality of earnings if it distorts the info in a way that is less useful for predicting future earnings and cash flows Format of the Income Statement Elements of the Income Statement •revenues- Inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering goods or services, or other activities that constitute the entity’s ongoing major or central operations. •expenses- Outflows or other using-up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out activities that constitute the entity’s ongoing major or central operations •gains- increases in equity from peripheral or incidental transactions of an entity except those that result from revenues or investments by owners •losses- decreases in equity from peripheral or incidental transactions of an entity except those that result from revenues or investments by owners -transaction approach focuses on the income related activities that have occurred during the period -the statement can further classify income by customer, product line, or function or by operating and non-operating, continued and discontinued, regular and irregular categories Single Step Income Statements 1
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-just two groupings: revenues and expenses -expenses are deducted from revenues to arrive at net income or loss -report tax separately as the last item before net income to indicate its relationship to income before tax -advantage: simple presentation and the absence of any implication that one type of revenue or
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Accounting 312- ch 5 - Accounting 312 Chapter 5- Income...

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