CHAPTER 4

UNDERSTANDING INCOME STATEMENTS

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 each for the earnings per share calculation.
  • Convert income statements to common-size income ...

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