Income Statement

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PREVIEW OF CHAPTER

4-1

4

Income Statement
Usefulness



Predicting future performance.



4-2

Evaluate past performance.

Help assess the risk or uncertainty of achieving future cash flows.

Income Statement
Limitations


Companies omit items that cannot be measured reliably.





4-3

Income is affected by the accounting methods employed.

Income measurement involves judgment. Income Statement
Quality of Earnings
Companies have incentives to manage income to meet or beat Wall Street expectations, so that


market price of stock increases and



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.

4-4

Format of the Income Statement
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




Dividend



Fee



Rent



4-5

Sales

Interest

Format of the Income Statement
Elements of the Income Statement
Expenses – Outflows or other using-up of assets or incurrences of liabilities that constitute the entity’s ongoing major or central operations.
Examples of Expense Accounts




Rent



Depreciation



Salaries and wages



4-6

Cost of goods sold

Interest



Taxes

Format of the Income Statement
Elements of the Income Statement
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




settlement of liabilities,



4-7

sale of investments or plant assets,

write-offs of assets.

Intermediate Components
Common for companies to present some or all of the
following

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