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The Accrual Concept

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Segregate operating income, any gains/losses (net of taxes) as of the measurement date. ... Accounting Changes. Voluntary vs. mandatory. How to Analyze Nonrecurring ... – PowerPoint PPT presentation

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Title: The Accrual Concept


1
The Accrual Concept
2
What is it?
3
Definitions
  • Economic income
  • Distributable earnings
  • Permanent earnings
  • Accounting income

4
Review??
  • Income statement
  • Various formats
  • Suggested format (p 35)
  • Why shouldnt we use presented format?
  • What about nonrecurring items?

5
Empirical research
  • Surprising to me!!!
  • Predictive ability?
  • Unusual infrequent items
  • Why do you think thats true?

6
Revenue Recognition
  • Timing?
  • Measurement?

7
Different ways to recognize revenue
  • Prior to title passage
  • After title passage

8
Remember construction accounting?
  • Completed contract vs of completion?
  • Costs incurred?
  • What type of account?
  • Amts billed to customers?
  • What type of account
  • Impact of choice of method on financials??

9
Additional revenue recognition methods
  • Installment method
  • Cost recovery method

10
Accounting Issues
  • Revenue Recognition
  • Sales incentives
  • Barter
  • Membership fees
  • Estimates
  • Gross vs net recognition
  • Early recognition
  • Shipping handling

11
Accounting Issues
  • Expense Recognition
  • Deferrals
  • Bad debt
  • Warranties

12
Accounting Issues
  • Classification
  • From cgs to operating expense

13
Complex Revenue Recognition
  • Software
  • Broadcast
  • Mortgage issuers
  • Exercise clubs
  • Incentives

14
Nonrecurring Items
  • Unusual or infrequent
  • Discontinued
  • Extraordinary
  • Change

15
Unusual or Infrequent
  • Special items
  • Reorganizations
  • Restructurings
  • Incentive to increase losses?

16
Discontinued Items
  • Segregate operating income, any gains/losses (net
    of taxes) as of the measurement date.

17
Extraordinary Items
  • Unusual AND infrequent
  • Plus g/l from early retirement of l.t. debt (most
    from this)

18
Accounting Changes
  • Voluntary vs. mandatory

19
How to Analyze Nonrecurring
  • Ignore companys classification
  • Sometimes nonrecurring recur a lot
  • Income statement
  • Misreporting impacts prior and future income
  • Cash flow statement
  • No impact
  • Current period only
  • Future impact
  • Implications for continuing operations

20
Earnings Manipulation
  • Timing
  • Income smoothing
  • Intertemporal
  • Classificatory
  • Big-bath
  • Accounting changes
  • Classification
  • Good news/bad news

21
Empirical Research
  • Big bath --- not proven
  • Smoothing proven

22
Quality of earnings
  • Consistency versus Conservatism

23
Balance Sheet
  • A L SE
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