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Chapter 4

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ACCO 310
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ACCO 310Chapter 4 NotesPerformanceThis chapter deals with performance ie the Income Statement ASPE and Statement of Comprehensive Income IFRSThe overall objective is to provide relevant information specifically feedback value and predictive value byEvaluating a firms past performanceprofitabilityAssist in assessing cash flowsAssessing risk it is important to know where profits come fromyou want them to come mostly from operations which is the bread and butter of the businessStatements that successfully meet the above criteria are said to have high earnings quality Earnings are of high quality when1Content is i unbiased and representationally faithful ie Paints a true picture of the companys results ii earnings are sustainablecoming from operations eg companies that have profits due to the sale of assets for example and not sales do not have sustainable earningswhat happens when all assets are sold2Presentation Must be clear concise and understandable Read table at top of page 162Shortcomings of the Statement of Comprehensive Income Income Statement1The use of estimates everywhere these may increase relevance but they are not necessarily reliable2Choice of accounting policies affects the numbersthis may introduce bias and provide an incentive to manage earnings3Some items dont show up at allif they cannot be measured or estimated reasonably they are excluded ie some leases losses on pensions contingencies just FYIyou will see some of this stuff later in the course and in 320 NB As you do problems in Chapters 4 5 refer back to the sample financial statements provided to youglance at these over and over again so that you form a mental picture of what these should look like and what goes where formatThen have an idea how the numbers got there notes and problems 1 Be prepared to crtitique an existing set of financial statements andor prepare a statement of comprehensive income from data given to you Lets use IFRS as the basis for our discussion since it is more involved than ASPEStatement of Comprehensive Income Single Statement formatMain SectionsHeader as per sample statementsINet Income Loss MultiStep or SingleStepExpenses by nature or functionA Continuing OperationsiOperationsMost operating itemsiiNonOperating other revenuesgainslosses not central to operationsthese include infrequent and unusual items see next pagesB Discontinued Operations See next pagesimportantCIncome TaxesNet Income ABCNet Income attributable toParentNonControlling interest portion of subsidiaries income not owned by parentDEarnings per Share EPS Disclosures See next pagesi Net IncomeBasicFully DilutediiContinuing OperationsBasicFully DilutedIIOther Comprehensive Income Loss See next pagesimportant2
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