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FINANCIAL STATEMENT I

THE INCOME STATEMENT


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

THE BALANCE SHEET & THE


STATEMENT OF CASH FLOWS

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