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Chapter 13

MGMT 30A Chapter Notes - Chapter 13: Financial Statement Analysis, Financial Statement, Income Statement

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Patricia Wellmeyer

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Chapter 13
Sustainable income: most likely level of income to be obtained by a company in the future
Discontinued operations: disposal of a significant component of a business, such as elimination
of a major class of customers or an entire activity
The income (loss) from discontinued operations:
The income (loss) from operations
The gain (loss) on disposal of the component
Discontinued operations: new section reports both the operating loss and the loss on disposal
net of applicable income taxes
Comprehensive income: sum of net income and other comprehensive income items
Trading security: bought and held primarily for sale in the near term to generate income on
short-term price differences
Copaies epot uealized losses o tadig seuities i the Othe epeses ad losses
section of the income statement
Available-for-sale securities: held with the intent of selling them sometime in the future, do not
include unrealized gains or losses on available for sale securities in net income, reported as
Othe opehesie ioe hih is ot iluded i et ioe
Change in accounting principle: principle used in the current year is different from the one used
in the preceding year, report most changes retroactively, same principle applies in all periods in
order to compare results across years
Quality of earnings: provides full and transparent information that will not confuse or mislead
users of financial statements
Pro forma income: excludes items that the company thinks are unusual or non-recurring
Channel stuffing: offering deep discounts, companies encourage customers to buy early (stuff
the channel) rather than later, boosts earnings in the current period, but often leads to a
disaster in subsequent periods because customers have no need for additional goods
Horizontal and Vertical Analysis
1. Intracompany basis: comparisons with a company are often useful to detect changes in
financial relatioships and significant trends
2. Iteopa asis: opaiso ith othe opaies poide isight ito a opa’s
competitive position
3. Industry averages: comparisons with industry averages provide information about a
opa’s elatie positio ithi the idust
Three basic tools in financial statement analysis to highlight significance of financial statement
1. Horizontal analysis
2. Vertical analysis
3. Ratio analysis
Horizontal analysis (trend): technique for evaluating a series of financial statement data over a
period of time, determine the increase or decrease that has taken place, expressed as either an
amount or percentage
Change since base period
Current results in relation to base period
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