Earnings per share i i accounting quality reliable

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Earnings per Share I I Accounting Quality Reliable Information Relevant Information Financial Statement Errors Nonrecurring Events Manager Intervention Predictive Ability Operating activities refer to a company's primary transactions. These include the purchase of goods from suppliers, the conversion of goods into finished products, the promotion and distribu- tion of goods, the sale of goods to customers, and post-sale customer support. For manufactur- ing companies, operating activities include the conversion of goods into finished products. The income statement reports on these operating activities such as sales, cost of goods sold, and seil- ing, general, and administrative expenses. Because they are the lifeblood of any company, operat- ing activities must be executed successfully for a company to consistently succeed. Nonoperating activities relate to the borrowing of money and the ancillary investment activities of a company. They are not a company's primary activities.' These activities are typically reported in the income statement as interest revenues and expenses, dividend revenues, gains losses on sales of securities, and net income attributable to noncontrolling interest. I Exceptions exist; for example, income derived from investments is operating income for financial-services firms such as banks and insurance companies. As another example, the income derived from financing subsidiaries of manufactur- ing companies, such as Ford Motor Credit and Caterpillar Financial, is part of operating income because these activities can be viewed as extensions of the sales process. 5-3
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Module 5 I Revenue Recognition and Operating Income 5-4 r identification of operating and nonoperating components is important for valuation __ apanies' equity (stock) and debt (notes and bonds). It is important, for example, to know company profitability results from operating activities, or whether poor operating perfor- is being masked by income from nonoperating activities. (We know that income from non- - g activities usually depends on a favorable investment climate, which can be short-lived.) Exhibit 5.1 classifies several common income components as operating or nonoperating. Operating Activities Distinguishing Operating and Nonoperating Income Components Nonoperating Activities list of operating activities above includes all the familiar operating items, as well as gains s on transactions relating to operating assets and the write-down of operating assets.' sr also includes "other" income statement items. We treat these as operating unless the tatement designates them as nonoperating or footnote information indicates that some fthese "other" items are nonoperating. Footnotes are usually uninformative about "other" statement items and "other" balance sheet items, and GAAP does not require specific e of such items unless they are deemed material.' 'e build our discussion of operating income around Pfizer's income statement (see Exhibit 5.2), includes all of the typical operating accounts. We highlight the following topics in this module:
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