You are an accountant and you want to invest in the stock market. You know the income statement is an effective tool for measuring a company's performance because the statement shows the profit or loss of the company during a period. You are given a choice to assess the strength of a company by looking at its financial statements. You can either choose the income statement, the balance sheet, or the statement of cash flows. Companies know that investors have a desire to have as much information as possible on a timely basis. So, they provide multiple-step income statements to provide better details to financial statement readers such as investors.

Consider the above scenario and answer the following questions:

Why should you use caution in using the net income as a measurement of the strength of a company? What are specific items on the income statement that might not be what they appear to be? What are the reasons for your choice?

What is the benefit of the detail presented in the cost of goods sold section of a multi-level income statement? Do you think this could be confusing to the readers and why?

What is the difference between selling and administrative expenses? Give two examples of accounts that might go under each of these two categories.

Give two examples of accounts that might be considered other. Do you agree with these being put at the bottom of the income statement? Why or why not?

Which statement would you choose and why? What information would you find particularly helpful on this statement in making your analysis? What information might be missing from the statement you chose that would be critical to a thorough analysis? Justify your answer using examples and reasoning.

How can earnings management affect the quality of the income statement numbers? Support your answers with appropriate research and reasoning.

Revenue recognition rules can be complicated but very important to producing accurate financial statements. Do you agree or disagree with this statement? Why?