Chapter Four

Chapter Four - Chapter Four: Income Statement Usefulness: o...

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Chapter Four: Income Statement Usefulness: o Evaluate past performance o Predicting future performance o Help asses the risk or uncertainty of achieving future cash flow\ Limitations o Companies omit items that cannot be measured reliably o Income is affected by the accounting methods employed o Income measurement involves judgment Quality of Earnings companies have incentives to manage income to meet or beat Wall Street expectations, so that. . o Market price of stock increases o Value of stock options increase Quality of earnings is reduced if earning management results in information that is less useful for predicting future earnings and cash flows Elements of the Income Statement Revenue: inflows or other enhancements of assets or settlements of its liabilities that constitute the entity’s ongoing major or central operations o Examples: sales, fee revenue, interest revenue, dividend revenue, rent revenue Expenses: outflows or other using-up of assets or incurrence of liabilities that constitute the entity’s ongoing major or central operations o Examples: cost of goods sold, depreciation expense, interest expense, rent expense, salary expense Gains: increases in equity (net assets) from peripheral or incidental transactions Losses: decreases in equity (net assets) from peripheral or incidental transaction o Gains and losses can result from: sale of investments or plant assests, settlement of liabilities, write-offs of assets Sing Step Income Statement Format Single step statement consists of just two groupings
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This note was uploaded on 11/09/2011 for the course PSY 1310 taught by Professor Brown during the Spring '07 term at Texas State.

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Chapter Four - Chapter Four: Income Statement Usefulness: o...

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