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 shouldn’t we use presented format? –What about nonrecurring items?

5. Empirical research Surprising to me!!! Predictive ability? Unusual & infrequent items Why do you think that’s 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? Amt’s 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 SoftwareBroadcast Mortgage issuers Exercise clubs Incentives

14. Nonrecurring Items Unusual or infrequent DiscontinuedExtraordinaryChange

15. Unusual or Infrequent “Special items” ReorganizationsRestructurings 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 company’s 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 IntertemporalClassificatoryBig-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