ACC 321 – CHAPTER 4 - ACC 321 Chapter 4 1....

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ACC 321 – Chapter 4 1. Income statement: a. Why is the Income Statement used? Measure Performance Help Investors/Creditors predict future cash flows (future earnings) Is typically used to determine executive compensation b. Limitations: Relevance versus reliability Increases in the value of: assets, brand recognition, customer satsifaction Estimates and judgment (humans) c. Earnings Quality / Earnings Management: Earnings expectations: wall street or street Motivation to meet “expectations” can be greater than motivation to properly manage the business Can result in earnings management - Estimate expenses below actual amounts - Bad debt expense, warranty expenses, restructuring charges Recognize sales early (aggressive revenue recognition) 2. IS Format: a. Single-step: Revenues minus Expenses Advantage: Simple EPS: income per shares outstanding b. Multi-step: Separate the operating and non-operating activities Sales-COGS=Gross Profit Add up operating expenses Gross Profit-Operating Expenses=Operating Income
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This document was uploaded on 11/02/2011 for the course ACC 321 at Miami University.

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ACC 321 – CHAPTER 4 - ACC 321 Chapter 4 1....

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