Accounting Theory

Chapter Four STATEMENT OF INCOME AND RETAINED EARNINGS— Usefulness * Evaluate past performance. * Predicting future performance. * Help assess the risk or uncertainty of achieving future cash flows. Limitations * Companies omit items that cannot be measured reliably. * Income is affected by the accounting methods employed. * Income measurement involves judgment. Earnings Quality Companies have incentives to manage income to meet or beat Wall Street expectations, so that * the market price of stock increases and * the value of stock options increase. Quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows. Elements of the Income Statement Revenues – Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity’s ongoing major or central operations. Examples of Revenue Accounts
Examples of Revenue Accounts

* Sales * Fee revenue * Interest revenue * Dividend revenue * Rent revenue Expenses – Outflows or