for a specified period without recognizing any artificial exclusions or modifications.9.The term “quality of earnings” refers to the credibility of the earningsnumber reported. Companies that use aggressive accounting policies report higher income numbers in the short-run. In such cases, we say that the qualityof earnings is low. Similarly, if higher expenses are recorded in the current period, in order to report higher income in the future, then the quality of earnings is also considered low.10.The major distinction between revenues and gains (or expenses and losses) depends on the typical activities of the company. Revenues can occur from a variety of different sources, but these sources constitute the entity’songoing major or central operations. Gains also can arise from many different sources, but these sources occur from peripheral or incidental transactions ofan entity. The same type of distinction is made between expenses and losses.
11.The advantages of the single-step income statement are: (1) simplicity and conciseness, (2) probably better understood by the layperson, (3) emphasison total costs and expenses, and net income, and (4) does not imply priority of one revenue or expense over another. The disadvantages are that it does notshow the relationship between sales revenue and cost of goods sold and it doesnot show other important relationships and information, such as income from operations, income before income tax, etc.12.Operating items are the expenses and revenues which relate directly to the principal activity of the concern; they are revenues realized from, or expenses which contribute to, the sale of goods or services for which the company was organized. The nonoperating items result from secondary activitiesof the company. They are not directly related to the principal activity of thecompany but arise from incidental activities.