Lecture notes S2 L 5 - Analyzing Operating Activities...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Analyzing Operating Activities – Subramanyam and Wild, ch. 6 – Robinson, Greuning, Henry, Broihahn, chl 8 – CFA Program Curriculum, Levels I and II. 1 Key Concepts and objectives The income statement presents information about the financial results of a firm over a period of time It shows how much revenue was generated and costs incurred in generating the revenue Corporate financial announcements often emphasise income statement more than the other financial statements Investment and credit analysts often scrutinise companies’ income statements to obtain a better understanding of corporate performance 2
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Key Concepts and objectives The key objectives are: – Understand different concepts of income – Describe and evaluate the effect of non-recurring items on financial reporting and analysis – Distinguish between operating and non operating components of the income statement and evaluate its relevance in financial statement analysis – Evaluate the general principles of revenue and expense recognition and its relevance in financial analysis – Understand the treatment of interest costs and accounting for income taxes and their relevance in financial statement analysis – Compute and analyse the basic and diluted earnings per share 3 Income Measurement Concepts of Income Economic Income Equals net cash flows + the change in the present value of future cash flows Includes both recurring and nonrecurring components renders it less useful for forecasting future earnings potential 4
Background image of page 2
3 Income Measurement Concepts of Income Permanent Income Also called sustainable earnings, or normalized earnings Estimate of stable average income that a company is expected to earn over its life Reflects a long-term focus Directly proportional to company value 5 Income Measurement Concepts of Income Accounting Income: Based on accrual accounting Permanent Component: the recurring component expected to persist indefinitely Transitory Component: the transitory (or non-recurring) component not expected to persist Value Irrelevant Component- irrelevant for valuation They are accounting distortions 6
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 Income Measurement Measurement Two main components of accounting income: Revenues (gains) Expenses (losses) 7 Income Measurement Revenues are earned inflows or prospective inflows of cash from – Revenues are expected to recur Gains are recognized inflows or prospective inflows of cash from non- operations. Eg. A gain on sale of a subsidiary – Gains are non-recurring 8
Background image of page 4
5 Income Measurement Expenses are incurred outflows, prospective outflows, or allocations of past outflows of cash from operations Losses are outflows not directly related to the ordinary activities of the business Expenses and losses are resources consumed, spent, or lost in pursuing revenues and gains 9 Income Measurement Alternatives Two major income dimensions:
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/27/2011 for the course CORPFIN 7827 taught by Professor Prokim during the Three '11 term at University of Adelaide.

Page1 / 25

Lecture notes S2 L 5 - Analyzing Operating Activities...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online