the accrual concept. what is it? definitions economic income distributable earnings permanent...
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The Accrual ConceptThe Accrual Concept
What is it?What is it?
DefinitionsDefinitions
Economic incomeEconomic income Distributable earningsDistributable earnings Permanent earningsPermanent earnings Accounting incomeAccounting income
Review??Review??
Income statementIncome statement– Various formatsVarious formats– Suggested format (p 35)Suggested format (p 35)– Why shouldn’t we use presented format?Why shouldn’t we use presented format?– What about nonrecurring items?What about nonrecurring items?
Empirical researchEmpirical research
Surprising to me!!!Surprising to me!!!
Predictive ability?Predictive ability?Unusual & infrequent itemsUnusual & infrequent items
Why do you think that’s true?Why do you think that’s true?
Revenue RecognitionRevenue Recognition
Timing?Timing?
Measurement?Measurement?
Different ways to recognize revenueDifferent ways to recognize revenue
Prior to title passagePrior to title passage
After title passageAfter title passage
Remember construction accounting?Remember construction accounting?
Completed contract vs % of completion?Completed contract vs % of completion?
Costs incurred? Costs incurred? What type of account?What type of account?
Amt’s billed to customers?Amt’s billed to customers?What type of accountWhat type of account
Impact of choice of method on financials??Impact of choice of method on financials??
Additional revenue recognition Additional revenue recognition methodsmethods
Installment methodInstallment method
Cost recovery methodCost recovery method
Accounting IssuesAccounting Issues
Revenue Recognition Revenue Recognition Sales incentivesSales incentives
BarterBarter
Membership feesMembership fees
EstimatesEstimates
Gross vs net recognitionGross vs net recognition
Early recognitionEarly recognition
Shipping & handlingShipping & handling
Accounting IssuesAccounting Issues
Expense RecognitionExpense RecognitionDeferralsDeferrals
Bad debtBad debt
WarrantiesWarranties
Accounting IssuesAccounting Issues
ClassificationClassificationFrom cgs to operating expenseFrom cgs to operating expense
Complex Revenue Recognition Complex Revenue Recognition
SoftwareSoftware
BroadcastBroadcast
Mortgage issuersMortgage issuers
Exercise clubsExercise clubs
IncentivesIncentives
Nonrecurring ItemsNonrecurring Items
Unusual or infrequentUnusual or infrequent
DiscontinuedDiscontinued
ExtraordinaryExtraordinary
ChangeChange
Unusual or InfrequentUnusual or Infrequent
““Special items”Special items”
ReorganizationsReorganizations
RestructuringsRestructurings
Incentive to increase losses?Incentive to increase losses?
Discontinued ItemsDiscontinued Items
Segregate operating income, any gains/losses Segregate operating income, any gains/losses (net of taxes) as of the measurement date.(net of taxes) as of the measurement date.
Extraordinary ItemsExtraordinary Items
Unusual AND infrequentUnusual AND infrequent
Plus g/l from early retirement of l.t. debt (most Plus g/l from early retirement of l.t. debt (most from this)from this)
Accounting ChangesAccounting Changes
Voluntary vs. mandatoryVoluntary vs. mandatory
How to Analyze Nonrecurring How to Analyze Nonrecurring
Ignore company’s classificationIgnore company’s classification
Sometimes nonrecurring recur a lotSometimes nonrecurring recur a lot
Income statement:Income statement:Misreporting impacts prior and future incomeMisreporting impacts prior and future income
Cash flow statement:Cash flow statement:No impactNo impact
Current period onlyCurrent period only
Future impactFuture impact
Implications for continuing operationsImplications for continuing operations
Earnings ManipulationEarnings Manipulation
TimingTimingIncome smoothingIncome smoothing
IntertemporalIntertemporal
ClassificatoryClassificatory
Big-bathBig-bath
Accounting changesAccounting changes
ClassificationClassification
Good news/bad newsGood news/bad news
Empirical ResearchEmpirical Research
Big bath --- not provenBig bath --- not proven
Smoothing – provenSmoothing – proven
Quality of earningsQuality of earnings
Consistency versus ConservatismConsistency versus Conservatism
Balance SheetBalance Sheet
A = L + SEA = L + SE