Chapter_4_Income_Statement_And_Related_Information_Course_Notes

Chapter_4_Income_Statement_And_Related_Information_Course_Notes

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CHAPTER 4 – INCOME STATEMENT AND RELATED INFORMATION 1. Income Statement 2. Format of the Income Statement 3. Reporting Irregular Items 4. Special Reporting Issues 1. Income Statement a. Usefulness Evaluate past performance Predicting future performance Help assess the risk or uncertainty of achieving future cash flows b. Limitations Companies omit items that cannot be measured reliably Income is affected by the accounting methods employed Income measurement involves judgment c. Quality of Earnings Companies have incentives to  manage income  to meet or beat Wall  Street expectations, so that o market price of stock increases and o value of stock options increase.  Quality of earnings  is reduced if earnings management results in  information that is less useful for predicting future earnings and cash flows.
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CHAPTER 4 – INCOME STATEMENT AND RELATED INFORMATION 2. Format of the Income Statement a. Elements of the Income Statement Revenues – Inflows or other enhancements of assets or settlements  of its liabilities that constitute the entity’s ongoing major or central  operations.  Examples of Revenue Accounts: o Sales o Fee revenue o Interest revenue o Dividend revenue o Rent revenue Expenses  – Outflows or other using-up of assets or incurrences of  liabilities that constitute the entity’s ongoing major or central operations.  Examples of Expense Accounts: o Cost of goods sold o Depreciation expense o Interest expense o Rent expense o Salary expense Gains – Increases in equity (net assets) from peripheral or incidental  transactions. Losses - Decreases in equity (net assets) from peripheral or incidental  transactions. Gains and losses can result from o sale of investments or plant assets,  o settlement of liabilities,  o write-offs of assets. b. Single Step Income Statement
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CHAPTER 4 – INCOME STATEMENT AND RELATED INFORMATION The single-step statement consists of just two groupings: Revenues Expenses Net Income No distinction between Operating and Non-operating categories. Income Statement (in thousands) Revenues   Sales $285,000   Interest revenue 17,000     Total revenue 302,000 Expenses:   Cost of goods sold 149,000   Selling expenses 10,000   Administrative expense 43,000   Interest expense 21,000   Income tax expense 24,000     Total expenses 247,000 Net Income $55,000 Earnings per share $ 0.75 c. Multiple-Step Format Separates operating transactions from nonoperating transactions. Matches costs and expenses with related revenues. 
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Chapter_4_Income_Statement_And_Related_Information_Course_Notes

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