ACCT CH 4

Purpose of Income Statement

Summarize profit generating activities that occurred during a particular period

net profit or loss during the reporting period

Operating Performance

includes the revenues, expenses, gains and losses that will probably continue in future periods

Income from Continuing Operations

inflows of resources resulting from providing goods or services to customers

Revenue

Outflows of resources incurred while generating revenue

Expenses

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

Operating Income

Includes gains and losses and revenues and expenses related to peripheral or incidental activities of the company

Nonoperating Income

Increases or decreases in equity from peripheral or incidental transactions of an entity

Gains and Losses

shows the amount of income earned by a company expressed on a per share basis

EPS

Basic EPS

Net Income less Preferred Dividends/ Weighted-Avg. Number of Common Shares Outstanding for the Period

Reflects the potential dilution that could occur for companies that have certain securities outstanding that are convertible into common shares or stock options that could create additional common shares if the options were exercised

Diluted EPS

Companies must disclose per share amounts for:

1) Income or loss from continuing operations
2) Each Separately Reported Item
3) Net Income or Loss

refers to the ability of reported earnings to predict a company's future earnings

Earnings Quality

To enhance predictive value, analysts try to separate:

Transitory Earnings from its Permanent Earnings

result from transactions or events that are not likely to occur again in the foreseeable future, or will have a different impact on earnings

Transitory Earnings Effects

Two Major Methods Managers Use To Manipulate Income

Income Shifting
Income Statement Classification

achieved by accelerating or decelerating the recognition of revenues or expenses

Income Shifting

include costs associated with shutdown or relocation of facilities or downsizing of operations

Restructuring Costs

Examples of Transitory Items

Special Items
Discontinued Operations
Extraordinary Items

Attempt by companies to identify the recurring portion of thier income; managers assessment of permanent earnings

Pro-forma Earnings

Comprehensive Income

Net Income + OCI

income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners

Comprehensive Income

includes transactions affecting the net assets of the firm that are considered by FASB to be events outside of management's control

OCI