IngramSM13rev - CHAPTER 13 Operating Activities THINKING...

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CHAPTER 13 Operating Activities THINKING BEYOND THE QUESTION How do we account for operating activities? Estimation methods can have a major effect on a company’s reported rev- enues and expenses. If appropriate methods are used, the revenues and expenses should be a fair representation of the company’s economic activities and should be useful for understanding future revenues and ex- penses. If methods are selected that do not provide a fair representation, current period profits may be a poor measure of current economic activit- ies. The income statement is divided into recurring and nonrecurring events. Decision makers often place more emphasis on recurring events because they are likely to indicate future results. Nonrecurring events affect future events indirectly. For example, large one-time losses can reduce the amount a company is able to invest in new assets. However, these losses should not continue to occur in the future. Proper distinction among re- curring and nonrecurring items should help stockholders and other de- cision makers evaluate a company’s future performance. QUESTIONS Q13-1 Both the income statement and the statement of cash flows report the results of operating activities. The difference is that the income statement reports the accrual-basis consequences of those activities, while the statement of cash flows reports the cash-basis consequences. As we have seen throughout this book, those consequences are often different. Information about both is necessary for managers and outsiders to make decisions regarding the organization. Q13-2 The income statement is organized to highlight certain information that is useful to financial statement users. By breaking out specific items separately, additional information about the workings of the organization are revealed. For example, if the company has material amounts of both sales revenue and service revenue, it is important for readers to know which side of the business contributed most to revenue and whether one side of the business is growing more rapidly than the other. For another example, it is important that financial statement users be able to evaluate 127
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128 Chapter 13 the ongoing regular activities separately from one-time events. For this reason, gains and losses are reported separately. It is true that all the revenues and all the expenses could each be totaled and then subtracted from each other to determine net income. To do so, however, would obscure important information. To use this approach might make accounting easier to learn, but it would reduce the amount of information provided to financial statement users and the quality of decisions they are able to make. Q13-3 Your friend is partially right—the income statement is full of estimates, and
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IngramSM13rev - CHAPTER 13 Operating Activities THINKING...

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