The Economic Consequences of Financial Reporting • Financial information can affect the distribution of wealth among investors. • Financial information can affect the level of risk accepted by a firm • Financial information can affect the rate of capital information in the economy and result in a reallocation of wealth between consumption and investment within the economy. • Financial information can affect how investment is allocated among firms Income Statement Elements • Revenues. Inflows or other enhancements of assets of an entity or settlement of its liabilities ( or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations. • Gains. Increases in net assets from peripheral or incidental transactions of an entity. • Expenses. Outflows or other using-up of assets or incurrences of liabilities • Loses. Decreases in net assets from peripheral or incidental transactions of an entity and from all other transaction and other events. Statement Format • The current operating performance concept of income base their arguments on the belief that only changes and events controllable by management that result from current-period decisions should be included in income • The all-inclusive concept of income hold that net income should reflect all items that affected the net increase or decrease in stockholders’ equity during the period, with the exception of capital transactions. Income from Continuing Operations • The amounts disclosed to arrive at income from continuing operations are the company’s normal and recurring revenues and expenses Discontinued Operations • The operations and cash flows of the component being disposed of must be eliminated from the operations and cash flows of the entity as a result of the transaction. • The entity must retain no significant involvement in the operations of the component after the disposal takes place. Extraordinary Items • Events and transactions of material effect that would not be expected to recur frequently and that would not be considered as recurring factors in any evaluation of the ordinary operating processes of the business. • Unusual nature high degree of abnormality and be unrelated or only incidentally related to ordinary activities • Infrequency of occurrence wouldn’t reasonably be expected to recur in the foreseeable future Accounting Changes • Change in an accounting principle. This type of change occurs when an entity adopts a GAAP that differs from one previously used for reporting purpose. • Change in an accounting estimates. These changes result from the necessary consequences of periodic presentation. • Change in a reporting entity. Changes of this type are caused by changes in reporting units, which may be result of consolidations, change in specific subsidiaries, or a change in the number of companies consolidated. • Errors. The result of mistakes or oversights such as the use of incorrect accounting methods or mathematical miscalculation. Earning Per Share (EPS) • The net income available to common stockholders is divided by the weighted average number of common shares outstanding during the accounting period. 1. Primary EPS 2. Fully Diluted EPS FINANCIAL STATEMENT II