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What is the usefulness of income statement?
- evaluate the past performance of a company
- provide a basis for predicting future performance
- help assess the risk of uncertainty of achieving future cash flows.
What are the limitations of income statement?
- companies omit items from the income statement that they can't measure reliably
- income numbers are affected by the accounting methods employed
- income measurement involves judgement
What is earnings management?
- planned timing of revenues, expenses, gains, and losses to smooth out bump in earnings
- used to increase income in the current year at the expense of income in future yeras
What is quality of earnings?
- information used to predict future earnings and cash flows, predictive value
- ability of reported earnings to predict future earnings
What is the transaction approach?
- method of income measurement
- focuses on income related activities that have occurred during the period
What is the capital maintenance approach?
- most common alternative to the transaction approach
- company determines income for the period based on the change in equity, after adjusting for capital contributions or distributions
- main drawback is that the components of income aren't evident in its measurement
What is revenues?
inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major central operations.
What are expenses?
outflows or other using-up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, carrying out other activities that constitute the entity's ongoing major or central operations
What are gains?
increases in equity from peripheral or incidental transactions of an entity except those that result from revenues or investments by owners
What are losses?
decreases in equity from peripheral or incidental transactions of an entity except those that result from expenses or distributions to owners
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