Accounts have not been aggregated so as to obscure

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Accounts have not been aggregated so as to obscure their true nature. Income statement numbers reflect economic earnings: revenues reflect all sales activity dur- ing the period and only those sales for that period; expenses are complete and properly mea- sured. Items are properly labeled and any netting or aggregation of numbers does not obscure their true nature or amount. Reported cash flows accurately portray all of the cash that flowed in and out of the company during the period. Relevant High-quality accounting informati on is relevant. In parti cular information isrelevant when: Reported earnings and cash flow numbers can be used to forecast the amount and timing 0 future earnings and cash flows. This attribute is referred to as "relevance" and we return to it in our forecasting module. Footnotes provide additional quantitative and qualitative information that is accurate an complete. Sometimes a balance sheet or income statement number is not the best indican of current value or is not predictive of future expectations. For example, LIFO inventory is reported on the balance sheet but the footnotes augment relevance by reporting the FIFO value of inventory. There are several ways that accounting quality is diminished. (For a good discussion of this issue, see Dechow, P., and C. Schrand. "Earnings quality," The Research Foundation of CFA Institute, Charlottesville, VA 2004). Unintentional Errors We must understand that there are errors in financial statements. Two reports signed by external auditors (one concerning adequacy of the company's internal controls and one disclosing the audi: opinion) provide some assurance that financial statements are free from material misstaternem However, those reports do not guarantee no errors; instead, they assert that any remaining errors are not large enough to affect the decisions of financial statement readers. One-time Events In the ordinary course of business, companies record one-time transactions that are not expect' to recur. For example, a lawsuit is settled or commodity prices spike and the company earns windfall profit. While these nonrecurring events are reliably measured and reported, by definiti they cannot be used to predict future periods' events. Those specific line items are not relev and our expectations about future earnings must not be swayed by such events. The challenge is in determining which items reported on the income statement are truly one-time events. Oft,
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Module 5 I Revenue Recognition and Operating Income 5-32 :::II==?i!l.lll·es highlight the existence of one-time items by reporting "pro forma" earnings in com- _ financial statements and press releases. Pro forma income commonly begins with GAAP e from continuing operations (which excludes discontinued operations and extraordinary "and then adjusts for other one-time items including restructuring charges, large gains and "and acquisition expenses (goodwill amortization and other acquisition costs). SEC Regula-
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