RSM220H1 Chapter Notes - Chapter 4: Accrual, Net Income, Earnings Management
Document Summary
Income statement: some businesses have greater risks. Manage risk-return tradeoff: some businesses have greater opportunities, value creation is essential to any business model. Find optimal balance between managing risks and taking opportunities to maximize net assets: low-cost/high-volume strategy (walmart, cost differentiation strategy (macy"s, different industries and strategies reflected in financial statements. Usefulness of income statement: evaluate past performance and profitability, provide basis for predicting future performance, assess risk of not achieving future net cash inflows. Can segregate operating income from non-recurring income sources (discontinued operations) Quality of earnings/information: values are estimates based on assumptions, accrual accounting requires estimates, mix of hard and soft numbers. Items that cannot be measured reliably are not reported. Contingency: uncertain situation over whether a gain or loss will occur, will be finally resolved when one or more future events occur or fail to occur: material/potentially material events that have uncertain future.
