C04 - 1 Chapter 4 The Income The Statement and Statement of...

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1 The Income The Income Statement and Statement and Statement of Statement of Cash Flows Cash Flows C hapter 4 An electronic presentation by Douglas Cloud Pepperdine University
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2 1. Understand the concepts of income. 2. Explain the conceptual guidelines for reporting income. 3. Define the elements of an income statement. 4. Describe the major components of an income statement. 5. Compute income from continuing operations. Objectives Objectives Continued Continued
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3 6. Compute results from discontinued operations. 7. Identify extraordinary items. 8. Prepare a statement of retained earnings. 9. Report comprehensive income. 10. Explain the statement of cash flows. 11. Classify cash flows as operating, investing, or financing. Objectives Objectives
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4 Concepts of Income Concepts of Income Capital Maintenance Concept Under this concept, corporate income for a period of time is the amount that may be paid to stockholders during that period and still enable the corporation to be as well off at the end of the period as it was at the beginning.
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5 Assume a corporation has net assets of $50,000 at the beginning and $90,000 at the end of the year, and that no additional investments or withdrawals were made. Ending net assets $90,000 Less: Additional investment 0 Ending net assets excluding investment $90,000 Less: Beginning net assets (50,000 ) Total income for the year $40,000 The corporation could The corporation could pay out $40,000 to pay out $40,000 to stockholders and still be stockholders and still be as well off at year-end. as well off at year-end. Concepts of Income Concepts of Income Capital Maintenance Concept
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6 Assume a corporation has net assets of $45,000 at the beginning and $80,000 at the end of the year. Stock- holders made additional capital investments of $10,000. Ending net assets $80,000 Less: Additional investment (10,000 ) Ending net assets excluding investment $70,000 Less: Beginning net assets (45,000 ) Total income for the year $25,000 Concepts of Income Concepts of Income Capital Maintenance Concept
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7 Transactional Approach Under this concept, a company records its net assets at their historical cost, and it does not record changes in the asset and liabilities unless a transaction, event, or circumstance has occurred that provides reliable evidence of a change in value. The transactional approach to income measurement is used in accounting today. Concepts of Income Concepts of Income
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8 Transactional Approach Concepts of Income Concepts of Income A corporation’s net income for an accounting period currently is measured as follows: Net income = Revenues – Expenses + Gains - Losses
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9 Conceptual Reporting Guidelines Conceptual Reporting Guidelines 1. Providing information about its operating performance separately from other aspects of performance. 2. Presenting the results of particularly significant activities or events that predict the amounts, timing, and uncertainty of its future income and cash flows.
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