Financial Accounting Exam 2
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usefulness of the income statement LO1
- 1. evaluating past performance
- 2. predicting future performance
- 3. help access the risk and uncertainty of achieving future cash flows
limitations of the income statement LO1
- 1. companies omit items from the income statement that they cannot measure reliably
- 2. income numbers are affected by the accounting methods employed.
- 3. income measurement involves judgment
two reasons why companies manage their earnings? LO1
- companies have incentives to manage income to meet or beat the wall street expectations so that
- 1. market price of stock increases
- 2. value of tock options increase
why might quality of earnings be reduced? LO1
only if earnings management results in information that is less useful for predicting future earnings and cash flows
format of the income statement, elements of the statement? LO2
what are revenues? LO2
- inflows or other enhancements of assets or settlement of its liabilities that constitute the entity's ongoing mayor or central operations
- Ex: sales, dividends, rent, fee, interest receivable
what are expenses? LO2
outflows or other using up of assets or incurrences of liabilities that constitute the entity's ongoing major or central operations
what are gains? LO2
Gains are increases in equity(net assets) from peripheral or incidental transactions of an entity except those that result from revenues or investment by owners
what are losses? LO2
Losses are decreases in equity(net assets) from peripheral or incidental transactions of an entity except those that result from expenses or distributions by owners.
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