Acc 230 Week 3

C H A P T E R

Income Statement and Statement of Stockholders’ Equity

Learning about earnings, the bottom line, Is very important most of the time. A phony number Just may encumber Those folks trying to make more than a dime.1

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—A. ORMISTON

The operating performance of a business firm has traditionally been measured by its success in generating earnings—the “bottom line.” Investors, creditors, and analysts eagerly await companies’ earnings reports. One objective of this book is to broaden the reader’s perspective of operating success to consider such yardsticks as “cash flow from operations” as well as net income. In this chapter, however, the focus will be on the income statement and how a company arrives at its “bottom line.” Chapter 5 presents examples of some of the ways companies manipulate their “bottom line” and what readers can look for to detect and adjust for these strategies. The income statement, also called the statement of earnings, presents revenues, expenses, net income, and earnings per share for an accounting period, generally a year or a quarter. (The terms income, earnings, and profit are used interchangeably throughout the book.) The statement of stockholders’ equity is an important link between the balance sheet and the income statement. This statement documents the changes in the balance sheet equity accounts from one accounting period to the next. Companies may choose to report the information on the statement of stockholders’ equity in a supplementary schedule or in a note to the financial statements rather than

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According to the New Book of Knowledge (1985) by Grolier Incorporated, limericks are difficult to write. Limericks, a form of nonsense-verse, consist of five lines, of which lines one, two, and five rhyme and have from eight to eleven syllables each; lines three and four rhyme, with five to seven syllables each. Although thousands exist in literature, it is estimated that only 200 are probably genuine, flawless...