Income Statement Concepts Lecture H2008

Income Statement Concepts Lecture H2008 - Accounting and...

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1 Accounting and Financial Reporting Income Statement The beauty and power of accrual accounting The Income Statement (or Statement of Earnings) Defined: Presents the firm’s results of operating activities over time . Wal-Mart’s 2004 Income Statement Revenues minus Expenses = Net Income Hutchison Whampoa’s 2004 Income Statement Disclosure Turnover = Sales Similar to US GAAP, but terms differ somewhat But… notice “Change in Fair Value…” Q : How are revenues defined? A: Inflow of assets or reduction of liabilities from operations (i.e., business activities). The Income Statement Q : How are expenses defined? A: Outflow of assets or increase in liabilities used to generate revenues. THE TIME-PERIOD “PROBLEM” z Cash flows may not occur in the The Income Statement same period as the economic activity that produces them ± Example: Sell goods on credit ± Accounting Solution: ACCRUALS!
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2 ACCRUALS VS. CASH-BASIS ACCOUNTING z Accrual-Basis Accounting ± Recognizes economic event The Income Statement z Revenues are recorded as they are earned z Expenses are recorded as they are incurred ± Is required by GAAP z Cash-Basis Accounting ± Simply cash in, minus cash out ± This is NOT GAAP and cannot be used by public companies anywhere! THE REVENUE RECOGNITION PRINCIPLE Q: When are revenues recognized?
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Income Statement Concepts Lecture H2008 - Accounting and...

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