1Accounting and Financial ReportingIncome StatementThe beauty and power of accrual accountingThe Income Statement (or Statement of Earnings)Defined:Ptthfi’ltfPresents the firm’s results of operating activities over time.Wal-Mart’s2004Income StatementRevenues minus Expenses =Net IncomeHutchison Whampoa’s 2004 Income StatementDisclosureTurnover = SalesSimilar to US GAAP, but terms differ somewhatBut… notice “Change in Fair Value…”Q: How are revenues defined? A: Inflow of assets or reduction of liabilitiesfrom operations (i.e., business activities). The Income StatementQ: How are expenses defined? A: Outflow of assetsor increase in liabilities used to generate revenues. THE TIME-PERIOD “PROBLEM”zCash flows may not occur in the The Income Statementsame period as the economic activity that produces themExample: Sell goods on creditAccounting Solution:ACCRUALS!
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