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Unformatted text preview: CHAPTER 4 Reporting Earnings and Financial Position THINKING BEYOND THE QUESTION How do we report earnings and financial position to stockholders? Using common rules and formats is important so that decision makers can compare results across companies and so they will have faith in the reliability of the information. If each company selected its own rules, the cost of comparisons would be extremely high as stakeholders would need to adjust each companys information to some common standard. Unless the rules used by companies are known, decision makers cannot determine whether reported information faithfully represents the com- panies underlying economic activities or not. If investors, creditors, and other stakeholders cannot evaluate how well companies are performing, they will not provide financial resources to the companies or will demand high rates of return to compensate them for the high risk associated with their investments. Strong accounting regulations are essential to creat- ing efficient capital markets. Countries without these regulations either have planned economies or underdeveloped ones. QUESTIONS Q4-1 Dividends are NEVER an expense. Dividends are a distribution of income, not a component of it. Q4-2 Students will have many responses but among them might be the following: a. What was the total selling price of goods and services sold this period? b. What was the amount of gross profit this period? c. What were the largest operating expenses this period? d. What was the amount of operating income this period? e. Were there revenues or expenses not directly related to the central operations of the business this period? f. What amount of income tax obligation was incurred this period? g. What was earnings per share this period? 91 92 Chapter 4 Q4-3 Students will have many responses but among them might be the following: a. What amount of cash did the firm have on hand at the end of the period? b. What amount of current assets did the firm have at the end of the period? c. What amount of current liabilities did the firm have at the end of the period? d. What amount of working capital did the firm have at the end of the period? e. What noncurrent assets did the firm own at the end of the period? f. What percentage of the long-term assets cost had been depreciated by the end of the period? g. Does this company have significant investments as of the balance sheet date? h. What long-term liabilities does this firm have at the balance sheet date? Q4-4 The primary reason is to maximize the amount of profit-related information conveyed to users. By breaking the information into separate and distinct categories, additional information is conveyed. Consider the opposite situation. At the extreme, one could report a one-section or even a one-line income statement. It would only report net income with no supporting detail. This would not be very useful because it would not provide any information as to the components of income....
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- Fall '11