CHAPTER 4

UNDERSTANDING INCOME STATEMENTS

Elaine Henry, CFA

Coral Gables, FL, U.S.A.

Thomas R. Robinson, CFA

Charlottesville VA, U.S.A.

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

  • Describe the components of the income statement and alternative presentation formats of that statement.
  • Describe the general principles of revenue recognition and accrual accounting, specific revenue recognition applications (including accounting for long-term contracts, installment sales, barter transactions, gross and net reporting of revenue), and the implications of revenue recognition principles for financial analysis.
  • Calculate revenue given information that might influence the choice of revenue recognition method.
  • Describe the general principles of expense recognition, specific expense recognition applications, and the implications of expense recognition choices for financial analysis.
  • Describe the financial reporting treatment and analysis of nonrecurring items (including discontinued operations, extraordinary items, unusual or infrequent items) and changes in accounting standards.
  • Distinguish between the operating and nonoperating components of the income statement.
  • Describe how earnings per share is calculated and calculate and interpret a company’s earnings per share (both basic and diluted earnings per share) for both simple and complex capital structures.
  • Distinguish between dilutive and antidilutive securities, and describe the implications of ...

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