The Accrual Concept

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The Accrual Concept
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What is it?
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Definitions

• Economic income
• Distributable earnings
• Permanent earnings
• Accounting income

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Review??

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

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Empirical research

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

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Revenue Recognition

• Timing?
• Measurement?

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Different ways to recognize revenue

• Prior to title passage
• After title passage

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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

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Accounting Issues

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

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Accounting Issues

• Expense Recognition
• Deferrals
• Bad debt
• Warranties

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Accounting Issues

• Classification
• From cgs to operating expense

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Complex Revenue Recognition

• Software
• Broadcast
• Mortgage issuers
• Exercise clubs
• Incentives

14
Nonrecurring Items

• Unusual or infrequent
• Discontinued
• Extraordinary
• Change

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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.

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Extraordinary Items

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

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Accounting Changes

• Voluntary vs. mandatory

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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

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Earnings Manipulation

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

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Empirical Research

• Big bath --- not proven
• Smoothing proven

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Quality of earnings

• Consistency versus Conservatism

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Balance Sheet

• A L SE