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