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income statement

income statement - 15.501/15.516 Financial Accoun2ng Spring...

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15.501/15.516’–’Financial’Accoun2ng’ Spring’±014’ Session’3 Professor’ João’Granja’ MIT’Sloan’School’of’Management
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Recap’of’last’class’ • Assets’=’Liabili2es’+’Owners±’Equity’ • When’to’record’an’asset:’ 1. The’asset’must’be’owned’or’controlled’by’the’company’ ². The’asset’must’possess’expected’future’beneFts’that’can’be’measured’ • When’to’record’a’liability:’ 1. The’future’sacriFce’is’probable’ ². The’amount’of’the’obliga2on’is’known’or’can’be’es2mated’ 3. The’event’that’caused’the’obliga2on’has’already’occurred • Equity’ • Made’up’of’Contributed’Capital’and’Earned’Capital’ • Beginning’RE+’NI’–’Dividends=Ending’RE ²’
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Plan’for’today’ • What’is’an’income’statement?’ • Understand’the’diFerence’between’accrual’accoun2ng’and’ cash’accoun2ng’ • Discuss’revenue’and’expense’recogni2on’concepts’ • Record’transac2ons’using’the’accoun2ng’equa2on’ • Prepare’income’statements’ 3’
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Income’Statement’ Reports’opera2ng’performance’ for’a’speciFc’2me’period .’ Provides’informa2on’about’what’happened’between’balance’sheet’periods’(did’ our’business’ac2vi2es’generate’more’resources’than’they’used’ this’year ?).’ Remember,’the’balance’sheet’and’the’income’statement’are’linked:’ Assets=Liabili2es’+’Equity’ ’ =’Liabili2es’+’Contributed’Capital’+’Earned’Capital’ ’ =Liabili2es’+’Contributed’Capital’+’Retained’Earnings’ ’ =Liabili2es’+’Contributed’Capital’+’Beginning’RE’+’NI’-Dividends’ ’ =Liabili2es’+’Contributed’Capital’+’Beginning’RE’+’Revenues-Expenses-Dividends’ 4’
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Net’Income’(Proft)’ • Net’Income’(or’Earnings)’=’Revenues’–’Expenses.’ • Academic’research’shows’that’CEOs’&’CFOs’view’earnings’to’ be’the’most’important’measure’o±’frm’per±ormance’reported’ to’outsiders’(Graham,’Harvey,’and’ Rajgopal’2005).’ 5’
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How’should’we’measure’ performance?’ NET INCOME=REVENUES - EXPENSES Two Bases of Accoun<ng : Cash-based accoun.ng recognizes’revenue’when’cash’is’ received from’customers’and’expenses’when’cash’is’ paid ’for’resources.’ Accrual accoun.ng recognizes’revenue’when’it’is’ earned ’and’ expenses’when’they’are’ incurred .’ Accrual’accoun2ng’can’produce’large’discrepancies’between’the’ Frm±s’reported’income’and’the’amount’of’cash’generated’by’ opera2on’ 6’ Very’Di²erent!!!’
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How’should’we’measure’ performance?’ 7’
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