DIGESTING FINANCIAL STATEMENTS: EARNINGS

For assessing how a company performed in a given period, the relation between income and cash flow statements should be taken into account. Several items in a financial report have an equivalent; however, the cash flow does not usually match its counterpart.

In a statement, expenses reflect the costs within a particular period that can be monitored either to money for future usage or money previously spent. Also, revenues pertain to cash currently earned which has been or to be received in the future.

There are four timing when reporting revenues:

• Underreporting liabilities - Excluding stock option costs and reducing net pension obligation by escalating the presumed return on pension assets

• Overvaluing assets - Failing to recognize weakened assets or underestimating outdated inventory

• Delaying expenses for future use - Taking huge write-offs, cashing in on expenditures, degenerating the depreciation process of long-term assets

• Premature revenue acknowledgement - Selling with prolonged financing deals

Aside from timing differences, classification is the other factor one should consider. This has become more complex, however, since the generally accepted accounting principles does not indicate a certain framework for coming up with an income statement.

The financial Accounting Standards Board unveiled a joint project with the International Accounting Standards Board in 2005. Dubbed as FASB-IASB project, it aims to formulate standards for presenting details in financial results. The said project seeks to further the usefulness of information in evaluating a business’ financial performance. The two organizations outlined a complete bunch of financial statements every entity should report:

• Balance sheet at the start of the period

• Balance sheet at the end of the period

• Cash flows (on top of dealings with owners)

• Changes in equity and class of equity

• Earnings and comprehensive income

The revenue portion of a financial statement will be covered in the next tutorial.