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Income Statements and Shareholder's Equity

1. Explain how the results that are determined on the income statement are related to the shareholder's equity on the balance sheet.
2. Why are the appropriate accruals and deferrals necessary in determining the true income of a firm?
3. In what sense could we say that the profits of a company are an increase in net assets of a firm?
4. Why is it critical to determine revenue from normal operations of a firm, and non-recurring revenue from non-operating sources?
5. How would inappropriate accruals and deferrals give misleading information on the income statement/balance sheet?
6. In determining income, how might the methods differ for purposes of the SEC, IRS, certification to public (CPAs), or other regulatory agencies?

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1. Explain how the results that are determined on the income statement are related to the shareholder's equity on the balance sheet.

Answer:
The result determined on the income statement is net profit. After the payment of dividend the residual income from the net profit gets accumulated for the financing new project. Here this residual income is accumulated in the retained earnings of balance sheet. Retained earnings are a component of shareholder's equity. Hence the shareholder's equity is related with the residual income left after dividend payment in the income statement.

2. Why are the appropriate accruals and deferrals necessary in determining the true income of a firm?

Answer:
Accruals and deferral are the expenditures that have been recognized until the future date. These are the expenditures that have been done in the current financial year but will be recognized latter in the future. As we know that cash transactions don't give information about other important business activities, such as revenue based on credit and future liabilities for the firm. This ...

Solution Summary

The solution discusses the income statements and shareholder's equity on a balance sheet. Appropriate accruals and deferrals necessary in determining the true income of a firm is analyzed.

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