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MGAC01H3 Study Guide - Midterm Guide: Retained Earnings, Earnings Management, Earnings Before Interest And Taxes

Financial Accounting
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Study Guide

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Accounting Notes 7:
High-quality earnings have the following characteristics:
1. Content
Unbiased, objectively determined.
Reflect the economic reality as all transactions and events are
appropriately captured.
Reflect primarily the earnings generated from ongoing core business
Closely correlate with cash flows from operations Earnings that convert
to cash more quickly provide a better measure of real earnings because
there is little or no uncertainty about whether they will be realized.
Based on sound business strategy and business model Consider the
riskiness of the business, business strategy, industry, and the economic
and political environments. Identify the effect of these on earnings
stability, volatility, and sustainability. Consider also the cost structure of
the company, including fixed versus variable costs. (High fixed costs can
make the company riskier in times of falling selling prices.)
2. Presentation
Transparent, as no attempt is made to disguise or mislead. It reflects the
underlying business fundamentals.
Earnings Management: The process of targeting certain earnings levels (whether current or
future) or desired earnings trends and working backwards to determine what has to be done to
ensure that these targets are met.
can involve the selection of accounting and other company policies, the use of
estimates, and even the execution of transactions.
In many cases, earnings management is used to increase income in the current year by
reducing income in future years.
Earnings management activities have a negative effect on the quality of earnings.
the main statement that gives information about performance is the statement of
income/comprehensive income
Objective 4: Measurement
Net Income: Revenues less expenses (including gains and losses) other than those defined
under IFRS as other comprehensive income.
Comprehensive Income: A measure of income under IFRS that includes net income plus other
comprehensive income.
Operating Income: Income from ongoing revenues after deducting expenses.
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