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1、Chapter4Page14of14Chapter4:IncomeStatementandRelatedInformation(REMEMBER:ALWAYSputheadingsonyourfinancialstatements,especiallyduringtheEXAMS.Pointsaresubtractedifthefinancialstatementsdonotlistthecompanyname,financialstatement,date/timeperiod.Also,ALWAYSdateyourjournalentries.)T
2、hepurposeofthischapteristoexaminethedifferenttypesofrevenues,expenses,gains,andlossesthataffecttheincomestatementandrelatedinformation.1)IncomeStatement:Reportthatmeasuresthesuccessofenterpriseoperationsforagivenperiodoftime.Providesinvestorsandcreditorswithinfothathelpsthempred
3、icttheamounts,timing,anduncertaintyoffuturecashflows.(Objective#2inourBasicObjectivesfromChapters1and2.)aUsefulnessoftheIncomeStatement:Incomeinformationisusefulfor:i)ii)iii)Informationaboutthevariouscomponentsofincome–revenues,expenses,gains,andlosses–ishelpfulforassessingtheli
4、kelihoodthatparticularcashflowswillcontinueinthefuture.bLimitationsoftheIncomeStatement:NetIncomeisan_________________thatreflectsassumptionsmade.Usersshouldbeawareofitslimitations.i)Itemsthatcannotbemeasuredreliablyarenotreportedintheincomestatement.Forexample:(1)(2)ii)iii)cQua
5、lityofEarnings:Ifmanagersarefocusedonmeetingfinancialtargets,suchasanalysts’forecaststothedetrimentofgoodbusinesspractices,thequalityofearningsandthequalityoffinancialreportingwillerode.Chapter4Page14of14Earningsmanagement:Ithasanegativeeffectonearningsqualityifitdistortstheinfo
6、rmationthatmakesthecurrentyear(1)misrepresentativeofacompany’struestateand(2)lessusefulforpredictingfutureearningsandcashflow.1)FormatoftheIncomeStatement:Transactionapproach:focusesontheincome-relatedactivitiesthathaveoccurredduringtheperiod.Thatis,netincomeresultsfromrevenue,e
7、xpense,gain,andlosstransactions.(Capitalmaintenanceapproachisthemostcommonalternative.Here,incomefortheperiodisdeterminedbasedonchangeinequity,afteradjustingforinvestmentsbyownersordividends.However,thecomponentsofincomearenotevidentinthecapitalmaintenanceapproach.)aElementsofth
8、eIncomeStatement:i)Revenues:ii)Expenses:iii)Gai
