Please, respond to the attached two classmate main posts. (Please, the responses need to be a discussion, not an evaluation. You can agree with them and add information regarding the topic discussed).Thank you
Instructions for the classmate classmate response (around 125 words each) Please, respond to the below two classmate main posts. (Please, the responses need to be a discussion, not an evaluation. You can agree with them and add information regarding the topic discussed. No citation required) Thank you Classmate discussion posts Discussion 1: Dayana Alvarez The income statement and its component give analysts insight about a company’s performance and help them assess the risk exposures, to predict the amounts, timing, and uncertainty of future cash flows (Subramanyam, 2014). The income statement summarizes the financial effects of a company’s operating activities and it is without a doubt one of the most important metrics of a company’s financial performance. Analysts use the information gathered from a company’s income statement to learn if a company’s income and operations have improved year-to-date and if there are any risks associated with its operations in the near future. It is important for the analysis that income is classified accurately. Income can be classified by two dimensions: recurring vs nonrecurring and operating vs nonoperating. Recurring and nonrecurring are used for the need to determine the permanent and transitory components of income such as net income, comprehensive income, and income from continuing operations (Subramanyam, 2014). Operating income is a measure derived from the company’s normal operating activities which means that operating income will exclude any income not related to the company’s primary business activity. Nonoperating income refers to all the other components not included in operating income (Subramanyam, 2014). I agree that both dimensions are different for classifying income because each dimension uses different measures and parts of the income statement. It is important to note that both dimensions are distinct in nature and purpose, for example, the operating vs nonoperating measure depends on the source of revenue or expense and whether it arises from the ongoing operations of the business (Subramanyam, 2014). The recurring vs nonrecurring measure depends on the behavior of the revenue or expense and whether it is expected to persist or if it’s a one-time event (Subramanyam, 2014). References: Subramanyam, K.R. and J. Wild. (2014). Financial Statement Analysis (11th ed.). New York, NY: McGraw Hill. Discussion 2: Laura Huhuenel The components of net income include revenues, gains, expenses, and losses. Revenues are earned inflows of cash from business activities such as cash sales and credit sales. Gains however, are earned inflows of cash that are not related to business activities such as gain on sale of investments or gain on legal settlement. Expenses are outflows of cash from business operations like salary expense and rent expense while “losses are decreases in a company’s net assets arising from peripheral or incidental operations of a company” (Subramanyam, 2014). Examples of losses include, but are not limited to, impairment of goodwill and loss on sale of investment securities. Analysts attach great importance to the evaluation of “income and its components to assess company performance and risk exposures, and to predict the amounts, timing, and uncertainty of future cash flows” (Subramanyam, 2014). Simply put, these results demonstrate the company’s value as determined by the size and quality of these results. Operating vs. non-operating and recurring vs. nonrecurring are two distinct dimensions of classifying income. I agree with this statement because even though they overlap at times, these dimensions offer different characteristics of business activities. Operating income “measures the amount of profit realized from a business's operations, after deducting operating expenses such as wages, depreciation, and cost of goods sold (COGS)” (Kenton, 2019). Analyzing operating income is a great way for investors to determine if the company is generating an increasing amount of income and if the company is, this is a good sign that “management is generating more revenue while controlling expenses, productions costs, and overhead” (Kenton, 2019). Non-operating income includes all components that are not classified as operating income. Some examples include dividend income, gains on investments, and gains on foreign exchange transactions. This is important for investors to analyze because at times company’s use this to cover up poor operational results. Investors must also analyze recurring and nonrecurring income because they also are helpful in classifying income. “The importance of classifying income components as recurring or nonrecurring arises from the need to determine the permanent and transitory components of income” (Subramanyam, 2014). Recurring income helps to predict a company’s future income. References Kenton, W. (2019, October 12). Operating Income Defined. Retrieved November 4, 2019, from https://www.investopedia.com/terms/o/operatingincome.asp. Kenton, W. (2019, October 12). Operating Income Defined. Retrieved November 4, 2019, from https://www.investopedia.com/terms/o/operatingincome.asp. Subramanyam, K. R. (2014). Financial statement analysis. New York, NY: McGraw Hill Education.