Usefulness of the Income Statement - earnings and cash...

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Usefulness of the Income Statement The income statement helps users of financial statements predict future cash flows in a number of ways. For example, investors and creditors use the income statement information to: 1. Evaluate the past performance of the company.  Examining revenues and expenses indicates how the company performed and allows comparison of its performance to its competitors. For example, analysts use the income data provided by Ford  to compare its performance to that of Toyota . 2. Provide a basis for predicting future performance.  Information about past performance helps to determine important trends that, if continued, provide information about future performance. For example, General Electric  at one time reported consistent increases in revenues. Obviously past success does not necessarily translate into future success. However, analysts can better predict future revenues, and hence
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Unformatted text preview: earnings and cash flows, if a reasonable correlation exists between past and future performance. 3. Help assess the risk or uncertainty of achieving future cash flows. Information on the various components of incomerevenues, expenses, gains, and losseshighlights the relationships among them. It also helps to assess the risk of not achieving a particular level of cash flows in the future. For example, investors and creditors often segregate IBM s operating performance from other nonrecurring sources of income because IBM primarily generates revenues and cash through its operations. Thus, results from continuing operations usually have greater significance for predicting future performance than do results from nonrecurring activities and events....
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This note was uploaded on 03/08/2011 for the course ACCOUNTING 14 taught by Professor Saeedi during the Spring '11 term at Amirkabir University of Technology.

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