Earnings Quality and the Income Statement

1
Chapter 4

• Earnings Quality and the Income Statement

2
Earnings Quality/Earnings Management

• What is the meaning and significance of earnings
  quality how do you assess it?
• Are earnings quality and earnings management
  complementary or mutually exclusive?
• What are the factors that affect earnings
  quality?
• Are companies' best interests served by reporting
  high-quality earnings?
• How do regulators and alternative information
  sources influence earnings quality?
• What financial statement elements signal earnings
  quality/earnings management?

3
When is revenue recognized?

• Revenues
• Earnings process is substantially complete
• Realized or realizable
• Point of sale why most common point in time?
• Other times?

4
Revenue recognitionSAB 104

• Pervasive evidence of an agreement
• Delivery has occurred/services have been rendered
• Collectibility is reasonably assured

• Sellers price ot the buyer is fixed or
  determinable
• Contract fees / fees for services that can
  otherwise be sold and priced separately

• Revenue recognize at gross or net ?
• Expedia.com
• Product rebates - Ford

5
Expenses Three ways to recordSouthwest
Airlines Examples

• Immediate recognition
• Systematic allocation
• Direct matching with revenues