Analyzing Operating Activities

Income Measurement

Economic income – measures the net change is shareholder’s wealth during a period

Permanent income – an estimate of the stable average income that a business is expected to earn over a period of time.

Alternative Income Classifications

Recurring and nonrecurring income

Operating and non-operating income

Extraordinary items

  1. Unusual nature
  2. Infrequent occurrences

Discontinued operations

  1. Disposal of entire division or product line
  2. May be a substantial portion of net income
  3. Find income before discontinued operations

Special items

  1. Asset impairments
  2. Restructuring changes

Comprehensive income

  1. Unrealized holding gains or losses (fair value)
  2. Foreign currency translation gains and losses
  3. Change in funded status of postretirement benefits
  4. Unrealized holding gains or losses arising from the effective portion of cash flow hedges

Revenue Recognition

  1. Revenue should not be recorded prematurely or belatedly
  2. Revenue recorded before certainty of realization

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