BU387 Chapter Notes - Chapter 4: Cash Flow Statement, Net Income, Retained Earnings
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Income statement/statement of income/earnings/comprehensive income: measures success of (cid:272)o(cid:373)pa(cid:374)(cid:455)(cid:859)s ope(cid:396)atio(cid:374)s fo(cid:396) spe(cid:272)ifi(cid:272) ti(cid:373)e pe(cid:396)iod. Business model: getting cash, investing it in resources, and using resources to generate profits. Financing: obtaining cash funding by borrowing, issuing shares, or retaining profits; Investing: using the funding to buy assets and invest in people and divestitures. Representational faithfulness: requires financial statements to reflect economic reality of running a business, including how it creates and sustains value. Risk management: identifying risks, deciding if and how to manage risks, and monitoring risk. Risk/return tradeoff: ma(cid:396)ket de(cid:373)a(cid:374)ds g(cid:396)eate(cid:396) (cid:396)etu(cid:396)(cid:374) (cid:449)he(cid:374) the(cid:396)e(cid:859)s g(cid:396)eate(cid:396) (cid:396)isk. Well-run companies develop strategies that will allow them to react to best opportunities to maximize shareholder value and maintain risks at acceptable level. Low cost/high volume strategy: attract more customers and get higher volumes of sales. Cost differentiation strategy: attract higher prices selling more unique and higher end products. Investors and creditors use information in income statement to:
