ACCT 3110 CH 4

ACCT 3110 CH 4 - Accounting3110:...

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Accounting 3110:   External   Financial Reporting I Chapter 4: Income Statement and Statement  of Cash Flows
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Earnings Quality Earnings quality  refers to the ability of  reported earnings to predict  a company’s future earnings. Transitory Earnings versus Permanent Earnings
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Operating  Income Non-operating  Income Operating Versus Non-operating Income Includes revenues  and expenses  directly related to  the  principal  revenue- generating  activities  of the  company Includes gains  and losses and  revenues and  expenses  related  to peripheral or  incidental  activities  of the  company
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Non-operating Income and Earnings Quality Gains and losses from the sale of operational  assets and investments often can significantly  inflate or deflate current earnings. Example As the stock market boom reached  its height late in the year 2000,  many companies recorded large  gains from sale of investments  that had appreciated significantly  in value.   How should  those gains be  interpreted in  terms of their  relationship to  future  earnings?  Are  they transitory  or permanent?
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Income Statement (Single-Step) Expenses  & Losses { { Revenues  & Gains { Proper Heading
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Income Statement (Multiple-Step) { Non-  operating  Items { Gross  Profit Operating  Expenses { MAXWELL GEAR CORPORATION Income Statement For the Year Ended December 31, 2009 Sales revenue 573,522 $ Cost of goods sold 302,371 Gross profit 271,151 Operating expenses: Selling 47,341 $ General and administrative 24,888 Research and development 16,300 88,529 Operating income 182,622 Other income (expense): Interest and dividend revenue 26,400 $ Gain on sale of operating assets 5,500 Interest expense (6,200) Loss on sale of investments (8,322) 17,378 Income before income taxes 200,000 Income tax expense 80,000 Net income 120,000 $ { Proper  Heading
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U. S. GAAP vs. IFRS Has no minimum  requirements.  SEC requires that expenses  be classified by function.  “Bottom line” called net income  or net loss. Report extraordinary items  separately. Specifies certain minimum  information to be reported on  the face of the income  statement.  Allows expenses classified by  function or natural description. “Bottom line” called profit or  loss.  Prohibits reporting  extraordinary items.  There are more similarities than differences between income statements prepared according to U.S. GAAP and those prepared applying IFRS. Some differences are highlighted below.
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Expenses Outflows of  resources  incurred in  generating  revenues. Revenues Inflows of  resources  resulting  from  providing  goods or  services to  customers.
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ACCT 3110 CH 4 - Accounting3110:...

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