COMM321 Chapter Notes - Chapter 4: Retained Earnings, Income Statement
13 Apr 2017
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Document Summary
Usefulness: evaluate past performance and profitability, predict future performance, assess potential risk in achieving future cash flows. Limitations: only quantifiable information included, use of estimates, quality of earnings must be assessed: Manipulation of income is possible (gaap, intentions) aggressive accounting policies to report higher income numbers in the short run. Quality of earnings: nature of the content a. Reflect economic reality: sustainability of earnings b. i. earnings from core business activities b. ii. closely related to cash flows from operations b. iii. based on sound business strategy/model, presentation, transparent, understandable. This item is the heart of the business - normal, routine - and would continue to occur from one period to the next. Relate to earnings reported in a prior period, thus, not included in current income. Recorded as adjustments to beginning r. e. (net of tax) on the statement of retained earnings or.
