CHAPTER 4 LECTURE
The following three areas is going to be of our concentration:
An understanding of the concepts underlying the measurement and presentation of income.
concepts such as the capital maintenance approach, the quality of earnings, the all-inclusive approach versus
the current operating performance approach, etc.
An understanding of each of the intermediate components of income and other irregular items, including prior
period adjustments, extraordinary
items, changes in accounting principle, etc.
You should be all able to:
recognize these items when encountered in problem material, and (2) identify the proper accounting and
disclosure procedure for each of them.
An understanding of proper format for income (including comprehensive income) and retained earnings
Given transaction data or account balances, you should be able to prepare single- and multiple-step
income statements, retained earnings statements, combined statements of income and retained earnings,
comprehensive income statements, combined statements of comprehensive income, and statements of
The Relative Importance of the Income Statement as Providing a Measure of Profit.
Income information helps interested parties predict the amount, timing, and uncertainty of future cash flows.
Income information is useful:
evaluating past performance
determining the risk (uncertainty) of achieving future cash flows
Information about the various
components of income—revenues, expenses, gains, and losses—is helpful for assessing the likelihood that
particular cash flows will continue in the future.
predicting future performance
There is major attention focused on a firm's earnings.
Limitations of the Income Statement.
Items that cannot be measured reliably are not reported in the income statement.
Unrealized gains and losses on certain investment securities.
The value of brand recognition, customer service, and quality.
Income numbers are affected by the accounting method used.
I like to brief you on the concept of the
quality of earnings.
The quality of earnings refers to how closely income is correlated with cash flows--- The higher the correlation is higher the
quality of the earning.
A comparison of net income with cash generated from operating activities may provide information
for assessing the quality of earnings.
Concepts of Income Measurement.
Let’s review concepts such as revenue recognition, matching, periodicity.
Professional judgment is often necessary to make determination on the quality of income. The realization principle
establishes criteria for recognizing revenue and income. While these criteria are met at the point of sale, they sometimes
are met before a sale occurs or even after a sale occurs. The amount of revenue and income is ultimately recognized is
the same under all of the revenue recognition methods.
Matching principle means that revenues generated and expenses incurred in generating those revenues should be