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There are significant departures from clean surplus

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1. There are significant departures from clean surplus accounting. For example a .Gains on marketable securities are reflected in stockholders' equity as "comprehensive income" rather than as income on the income statement b. Wide use of employee stock options c. Foreign currency translations d. Some pension adjustment 2. Determinants of residual income(e.g. ,book value and ROE) are not predictable. Violations Violations of clean surplus surplus accounting 1. Some events are not reported on the income statement.But do find their way to the equity section of the balance sheet. In these cases, the book value of equity is correct, but net income is not. a. These omissions from net income can distort naive forecasts of net income and ROE. b. other timeshare, these positive and negative omissions can offset each other over time(e.g., foreign currency translations) c. c. The analyst must determine how these items will affect future forecast 2. For example. Increase in fair value of some financial assets increase the value of equity through "comprehensive income", but these gains re not included on the income statement. a. the analyst can adjust this by adding the gain to Net Income in calculating ROE b. The reverse would hold for decreases in fair value. c. c. No adjustment to invested capital is necessary b/c it already reflects the change in market value through the comprehensive income calculation.
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