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LN - IS (ch 4) - Ch 4 Income Statement ACCT 401 SP...

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Ch 4: Income Statement ACCT 401, SP 11 **MULTIPLE-STEP INCOME STATEMENT & COMPREHENSIVE INCOME STATEMENT** REVENUES – COST OF GOODS SOLD GROSS PROFIT – SELLING, GENERAL & ADMINISTRATIVE EXPENSES INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST & TAXES – INTEREST EXPENSE + OTHER INCOME (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE TAXES + INCOME TAX PROVISION (OR BENEFIT) INCOME FROM CONTINUING OPERATIONS AFTER TAXES + DISCONTINUED OPERATIONS/ITEMS (net of tax) + EXTRAORDINARY ITEMS (net of tax) NET INCOME + ADJUSTMENTS RELATED TO INVESTMENTS (net of tax) + ADJUSTMENTS RELATED TO PENSIONS (net of tax) + ADJUSTMENTS RELATED TO DERIVATIVES (net of tax) + ADJUSTMENTS RELATED TO FOREIGN CURRENCY TRANSLATION (net of tax) + ADJUSTMENTS RELATED TO OTHER THAN TEMPORARY IMPAIRMENTS FOR DEBT SECURITIES (net of tax) COMPREHENSIVE INCOME EPS **RETAINED EARNINGS STATEMENT** BEGINNING RETAINED EARNINGS + ADJUSTMENT FOR CUMULATIVE EFFECT ON PRIOR YEARS OF RETROSPECTIVE APPLICATION OF CHANGE IN ACCOUNTING PRINCIPLE (net of tax) + PRIOR PERIOD ADJUSTMENTS (net of tax)
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Ch 4: Income Statement ACCT 401, SP 11 BEGINNING RETAINED EARNINGS, AS ADJUSTED + NET INCOME/LOSS (net of tax) – DIVIDENDS ENDING RETAINED EARNINGS
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Ch 4: Income Statement ACCT 401, SP 11 1. THE INCOME STATEMENT (statement of operations) is to summarize profit- generating activities that occurred during a reporting period. 1) The usefulness of income statement to investors: A) Evaluate the past performance of the company B) Aids in the prediction of future performance . C) Helps to assess the risk or uncertainty of achieving future cash flows. 2) Commonly cited limitations of the income statement: A) Usefulness is limited by managers’ ability to measure transactions. B) Sensitivity to accounting methods. C) Reflects judgments made by management.
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Ch 4: Income Statement ACCT 401, SP 11 2. EARNINGS QUALITY 1). Earnings quality refers to the ability of reported earnings (income) to predict a company’s future earnings. ______________________________ from conceptual framework 2). Events or activities that can decrease earnings quality : A). TRANSITORY EARNINGS: Transitory earnings effect result from transactions or events that are unlikely to occur again in the foreseeable future. Examples: o Transitory earnings: ___________________________________________ o Permanent earnings: ___________________________________________ B). EARNINGS MANAGEMENT Planned timing of revenues, expenses, gains or losses by management. Examples: o ___________________________________________________________ o ___________________________________________________________
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Ch 4: Income Statement ACCT 401, SP 11 3. IRREGULAR” OR “SEPARATELY REPORTED” ITEMS 1) Examples: A) Discontinued Operations (net of tax) B) Extraordinary Items (net of tax) C) Unusual Items D) Accounting Changes E) Error Corrections 2) Irregular items are TRANSITORY items. A) The FASB details specific accounting treatment to avoid companies taking advantage of such events in their financial reporting. B) Such items generally are NOT predictive of future earnings.
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