华中科技大学：《财务报表分析》（英文版）CHAPTER 9 Profitability Analysis

Profitability Analysis CHAPTER

Profitability Analysis 9 CHAPTER

Analyzing Profitability Focus of Profitability Analysis Profitability analysis is a key part of financial statement analysis All financial statements are pertinent to profitability analysis Emphasis of profitability analysis is on the income statement

Analyzing Profitability Focus of Profitability Analysis ➢ Profitability analysis is a key part of financial statement analysis ➢ All financial statements are pertinent to profitability analysis ➢ Emphasis of profitability analysis is on the income statement

Analyzing Profitability Focus of Profitability Analysis Profitability analysis helps address questions such as What is a company's relevant income measure? What is the quality of income? What income components are important for forecasting? How persistent are income and its components? What is a company' s earning power?

Analyzing Profitability Focus of Profitability Analysis Profitability analysis helps address questions such as: What is a company’s relevant income measure? What is the quality of income? What income components are important for forecasting? How persistent are income and its components? What is a company’s earning power?

Analyzing Profitability Measuring Income Income is defined as revenues less expenses over a reporting period This definition does not yield a unique amount because ofa 三 stimation ssues ☆ Accounting Methods Incentives for Disclosure A Diversity across Users

Analyzing Profitability Measuring Income Income is defined as revenues less expenses over a reporting period This definition does not yield a unique amount because of: ❖ Estimation Issues ❖ Accounting Methods ❖ Incentives for Disclosure ❖ Diversity across Users

Analyzing Profitability Measuring Income--Estimation Issues Income measurement depends on estimates of future events These estimates require: Use of judgment and probabilities Allocations of revenues and expenses across periods I. Prediction of the future usefulness of many assets I. Forecasts of future obligations

Analyzing Profitability Measuring Income--Estimation Issues Income measurement depends on estimates of future events These estimates require: • Use of judgment and probabilities • Allocations of revenues and expenses across periods • Prediction of the future usefulness of many assets • Forecasts of future obligations

Analyzing Profitability Measuring Income--Estimation Issues Management discretion is part of income measurement Estimates of skilled and experienced professionals Some consensus (less variability)

Analyzing Profitability Measuring Income--Estimation Issues Management discretion is part of income measurement Estimates of skilled and experienced professionals → Some consensus (less variability)

Analyzing Profitability Measuring Income-Accounting Methods Professional Social experience Influences Accounting standards Regulatory Political governing agendas Income pressures measurement Business Academic happenings research

Analyzing Profitability Measuring Income--Accounting Methods Professional experience Regulatory agendas Business happenings Academic research Social Influences Political pressures Accounting standards governing income measurement

Analyzing Profitability Measuring Income-Accounting Methods Methods reflect the outcome of numerous factors including compromises Discretion is permitted to accommodate different business circumstances Methods geared toward"general-purpose financial statements

Analyzing Profitability Measuring Income--Accounting Methods Methods reflect the outcome of numerous factors, including compromises Discretion is permitted to accommodate different business circumstances Methods geared toward “general-purpose” financial statements

Analyzing Profitability Measuring Income--Incentives for Disclosure Ideally: O Financial statements fairly present transactions and events 2 Accounting is neutral--not affecting how transactions and events are perceived 3 Methods chosen that are most applicable to the circumstances 4 Relevant information is disclosed--favorable and unfavorable

Analyzing Profitability Measuring Income--Incentives for Disclosure Ideally:  Financial statements fairly present transactions and events  Accounting is neutral—not affecting how transactions and events are perceived  Methods chosen that are most applicable to the circumstances  Relevant information is disclosed—favorable and unfavorable

Analyzing Profitability Measuring Income--Incentives for Disclosure Reality: O Each of us possess opinions-we see the world from different perspectives 2 Managers bring strong views to the table 3 Managers feel pressures of com petition and society 4 Directors expect results s Shareholders concentrate on the bottom line 6 Creditors want safeguards o Financial analysts dislike surprises 8 Accounting preparers and auditors demand acceptable practices

Analyzing Profitability Measuring Income--Incentives for Disclosure Reality:  Each of us possess opinions--we see the world from different perspectives  Managers bring strong views to the table  Managers feel pressuresof competition and society  Directors expectresults  Shareholders concentrate on the bottom line  Creditors want safeguards  Financial analysts dislike surprises  Accounting preparers and auditorsdemand acceptable practices