chapter 4 notes.docx

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Accounting & Financial Management
AFM 291
Robert Ducharme

Chapter 4 Reporting Financial Performance  Business is based on the model of getting cash  (1) Financing: obtaining cash funding, borrowing or issuing shares  (2) Investing: using funding to buy assets  (3) operating: utilizing assets and people to earn profits  Take on different levels of risk and find different opportunities  Financial statements should capture fundamental business activities and communicate them appropriately  Balance sheet aims to capture financing and investing activities  Income statement aims to capture operating and performance related activities  Cash flow statements looks at the interrelationship between activities Income Statement Usefulness of the Income Statement  Evaluate the enterprise's past performance and profitability  Provide a basis for predicting future performance  Help assess the risk/ uncertainty of achieving future cash flows Limitations of the Income Statement  Net income is not point of estimate  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  Need to evaluation content (integrity of the information and the sustainability)  Presentation  Information should be unbiased, reflects reality, and is transparent and understandable  Companies with higher quality earnings are attributed higher values by
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