Statements of earnings retained earnings by chrisandersen



A. Role of the Income Statement (Statement of Earnings)
   1. Measure of overall economic performance of the enterprise
   2. Measure of relative efficiency of operations
   3. Measure of current and future cash flows that will result
      from a period's operations
   4. Information about the probable timing of cash flows
   5. Information about the risk levels of cash flows

B. Limitations of Statements of Earnings
   1. Changes in the value of some resources are not reported in
      statements of earnings based on historical-costs.
   2. Changes in the value of the measuring unit--the dollar-- are
      not considered in statements of earnings based on historical
   3. The selection of generally accepted accounting methods can
      affect the level of earnings reported. This difference is
      due entirely to the choice of accounting methods.
   4. The "quality" of reported earnings may vary.
      a. Length of "useful lives" used for depreciation purposes
      b. Use of straight-line vs. accelerated depreciation methods
      c. Number of periods used to amortize the cost of intangible
      d. Conservatism reflected in estimates of future expenses,
         reductions in revenue, and gains or losses.
      e. Revenue recognition criteria in use.

C. Reporting Format Options
   1. Single-step or multiple-step statements
   2. Condensed or more detailed financial statements
   3. Comparative or single period disclosure.

D. Major Sections of Statements of Earnings
   1. Operating section
      a. sales or revenue
      b. cost of goods sold
      c. selling expenses
      d. administrative or general expenses
   2. Nonoperating (but continuing) section
      a. Other revenues and gains, generally net of related expenses
         from nonoperating activities.
      b. Other expenses and losses, generally net of any related
         incomes, from nonoperating transactions.
      c. Sometimes several unusual items that are not properly
         classified as extraordinary items are reported in a
         separate section titled "Unusual Items" after items form
         continuing operations and before extraordinary items and
         the reporting of income taxes on continuing operations.
3. Income taxes levied on income from continuing operations
4. Discontinued operations
   a. Shown net of tax
   b. Disposal of a segment of a business constituting a separate
      line of business or a class of customers
   c. Does not include:
      (1) Disposal of part of a line of business
      (2) Shifting production or marketing activities for a
           particular line of business from one location to
      (3) Phasing out a product line or class of service
      (4) Other    changes    associated    with   technological
   d. Note that many restructurings are not considered to be
      discontinuances of operations.

5. Extraordinary items - unusual and infrequent material gains
   and losses.
   a. Unusual nature:--The underlying event or transaction should
      possess a high degree of abnormality and be of a type
      clearly unrelated to, or only incidentally related to the
      ordinary and typical activities of the entity, taking into
      account the environment in which the entity operates.
   b. Infrequency of Occurrence:--The underlying event or
      transaction should be of a type that would not reasonably
      be expected to recur in the foreseeable future, taking into
      account the environment in which the entity operates.
   c. Material as evaluated on an item-by-item basis.
   d. Explicitly excludes:
      (1) Writedown or writeoff of receivables, inventories,
           equipment leased to others, deferred research and
           development costs, or other intangible assets.
      (2) Gains or losses from exchange or translation of
           foreign currencies, including those relating to major
           devaluations and revaluations.
      (3) Gains or losses on the disposal of a segment of a
      (4) Other gains or losses from the sale or abandonment of
           property, plant, or equipment used in the business.
      (5) Effects of a strike, including those against
           competitors and major suppliers.
      (6) Adjustment of accruals on long-term contracts.
   e. Explicitly includes:--Material gains and losses from the
      extinguishment of debt.
   6. Cumulative effect of a change in accounting principle
      a. Cumulative effect, net of tax, based on a retroactive
         computation of changing to a new accounting principle
      b. The effect of the change on the current year's operations
         should be incorporated into the revenues and expenses of
         the period based on the principle adopted.
   7. Net Income or Net earnings
   8. Earnings per share information
      a. Net income per share
      b. Income from continuing operations per share
      c. Income before extraordinary items and cumulative effect of
         changes in accounting principles per share
      d. Cumulative effect of changes in accounting principles per

E. Accounting Changes: Estimates, Principles or Errors
   1. Estimates significantly influence the level of net income
      earned during any accounting period. Changes and updates in
      most estimates are deemed to affect current and future
      periods, not prior periods. Examples include changes in the
      realizability of receivables and inventories; changes in the
      estimated economic lives of plant and equipment, and
      intangible assets; and changes in estimated warranty costs,
      income taxes and employee benefits. Estimates are constantly
      being revised and updated based on changing economic
      conditions and new information.
   2. Accounting Principles may be changed voluntarily by a company
      to more accurately reflect its operating performance--or the
      change may be involuntary.       The company's independent
      accountant may require a change to meet the auditor's
      judgment about adequate disclosure in accordance with
      generally accepted accounting standards (GAAP).           The
      Securities Exchange Commission (SEC) may require the change,
      or the change may be required to implement a new accounting
      standard promulgated by the Financial Accounting Standards
      Board (FASB).
   3. Accounting Errors occur for a variety of different reasons,
      including inadequate investment by management in good systems
      that are operated by well-trained people. Errors made in an
      accounting period are normally discovered and corrected
      within the same accounting year. Year-end accounting review
      procedures and the subsequent independent audit are designed
      to locate and correct errors prior to the finalization and
      distribution of the annual financial statements. However,
      errors of one period may go undetected until a later period.
      Since   financial  statements   cannot   be   "recalled   for
      correction," correction of prior period income are made to
      the beginning balance of Retained Earnings in the Statement
      of Retained Earnings or Combined Statement of Earnings and
      Retained Earnings.

To top