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Chapter 4

Chapter 4 – reporting financial performance.docx

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Course Code
ACC 414
Else Grech

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Chapter 4 – reporting financial performance INCOME STATEMENT  Usefulness of the income statement o Evaluate the enterprises past performance and profitability o Provide a basis for predicting future performance o Helpassess the risk or uncertainty of achieving future cash flows  Limitations of the income statement o Net income is not a point estimate  calculated based on numerous assumptions  A mix of hard numbers (easy to measure and a high level of certainty) and soft numbers (difficult to measure )  Items that cannot be measured reliably are not reported in the income statement  Income numbers are affected by the accounting methods that are used.  Income measurement involves the use of estimates.  Differing views of how to measure net income  Quality of Earnings (nature of the content and the way it is presented) o Content of the earnings information  Integrity of the information must be considered  The sustainability of the earnings must also be considered o Presentation of the information, easy to use and understandable o Earnings management: process of targeting certain earnings level s or desired earnings trends and then working backwards to determine what has to be done to ensure that these targets are met FORMAT OF THE INCOME STATEMENT  Having ncome statement elements shown in some detail and in a format that shows the data from prior years allows decision makers to better assess whether a company does indeed generate cash flows and whether it is getting better or worse  Items required in the income statement under IFRS o Revenues o Shar
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