Accounting Theory

Topics: Revenue, Income statement, Generally Accepted Accounting Principles Pages: 17 (3282 words) Published: September 17, 2013
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 other using-up of assets or incurrence of liabilities that constitute the entity’s ongoing major or central operations. Examples of Expense Accounts

* Cost of goods sold
* Depreciation expense
* Interest expense
* Rent expense
* Salary expense

Gains – Increases in equity (net assets) from peripheral or incidental transactions.
Losses - Decreases in equity (net assets) from peripheral or incidental transactions.

Gains and losses can result from * sale of investments or plant assets, * settlement of liabilities, * write-offs of assets.

Income From Continuing Operations
Income from continuing operations includes revenues, expenses, gains and losses that will probably continue in future periods.

Within Income from Continuing activities one has Operating Income and Non-Operating Income

Operating Income Includes revenues and expenses directly related to the principal revenue-generating activities of the company

Non-operating Income Includes gains and losses and revenues and expenses related to peripheral or incidental activities of the company

The Income from Continuing Operations can be shown in either the Single Step Format or the Multi-step Format...
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