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Big Bath Accounting
Involves the inclusion of recurring operating expenses in "special charge" categories such as restructuring costs.
Income Statement Classification
The most common form of income statement classification is sometimes called "big bath" accounting.
Channel Stuffing
Accelerates revenue recognition by persuading distributors to purchase more of your product than necessary near the end of a reporting period.
Income Shifting
Is achieved by accelerating or delaying the recognition of revenues or expenses, which could be done through a practice called channel stuffing.
The Two Ways Managers Manipulate Income
1. Income shifting
2. Income statement classification
Other Income(expense)
Often is the classification used by companies in the income statement for nonoperating items.
Transitory Earnings
Result from transactions or events that are not likely to occur again in the foreseeable future or that are likely to have a different impact on earnings in the future.
Should Restructuring Costs be considered part of a company's permanent earnings stream
A financial statement user must interpret restructuring charges with consideration of the company's past history.
Some Unusual Items that warrant Additional Scrutiny
1. Restructuring Costs
2. Goodwill impairments
3. Asset impairments
4. Loss from write down of inventory
5. Loss from natural disasters
6. Gain or loss from litigation settlements
These items require investigation to determine their permanent or transitory nature.
Revenue Issues related to Unusual Items and Earnings Quality
1. Company loses a major customer that can't be replaced
2. Timing of revenue recognition in which pressure to meet certain earnings expectations may lead to premature revenue recognition.
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