Chapter 4 notes - Income Statement -The income statement is...

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Income Statement --The income statement is the report that measures the success of company operation for a given period of time. --The business and investment community uses the income statement to determine profitability, investment value, and creditworthiness. --The income statement provides investors and creditors with information that helps them predict the amounts, timing, and uncertainty of future cash flows. Usefulness of the Income Statement Investors and creditors use the income statement information to: Evaluate the past performance of the company, provide a basis for predicting future performance, and help assess the risk or uncertainty of achieving future cash flows. Limitations of the Income Statement --Net income is an estimate and reflects a number of assumptions; therefore users need to be aware of certain limitations: Companies omit items from the income statement that they cannot measure, income members are affected by the accounting methods employed, and income measurement involves judgment. --The limitations of the income statement reduce the usefulness of its information for predicting the amounts, timing and uncertainty of future cash flows. Quality of Earnings --The SEC has expressed the concern that the motivations to meet earnings targets may override good business practices, eroding the quality of earnings and the quality of financial reporting. Earnings Management- It is often defined as the planned timing of revenues, expenses, gains and losses to smooth out bumps in earnings. Format of the Income Statement --Net income results from revenue, expense, gain and loss transactions and the income statement summarizes these transactions. --The difference between revenues and gains and between expenses and losses depends on whether the activity is a regular operation or not. Single-Step Income Statements
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Chapter 4 notes - Income Statement -The income statement is...

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