What Are Accounting Earnings?

Accounting earnings, another name for a company’s stated earnings, or 澳洲幸运5开奖号码历史查询:net income (NI), are calculated by subtracting business expenditures, including cost of goods sold (COGS), general and administrative expenses (G&As), depreciation, interest, and taxes, from revenue. In effect, it shows the amount of money a company has left over after deducting the explicit co💧sts of running the business.

Accounting earnings should not be confused with 澳洲幸运5开奖号码历史查询:economic earnings, which measure the actual prof🍌itability of a company.

Understanding Accounting Earnings

The primary goal of any company is to earn money. That means that profit, the proceeds a business is left with after accounting for all expenses, is often the go-to metric for investo🌳rs and analysts to gauge performance ♊and evaluate the health of stocks listed on exchanges.

The problem is that companies often publish various versions of profit, or earnings, in their 澳洲幸运5开奖号码历史查询:financial statements. Some of these figures conform to 澳洲幸运5开奖号码历史查询:ge🎃nerally a🍒ccepted accounting practices (GAAP). Others are creative interpretations put toget💯her by management and their accountants.

Accounting earnings, the bottom line of the 澳洲幸运5开奖号码历史查询:income statement, fall into the former category. The income statement, one of three financial statements used for reporting financial performance, lists all revenues, expenses, gains, and losses over a specific 澳洲幸运5开奖号码历史查询:accounting period. At the e🍃nd it tallies all of this up, presenting investors with a snapshot of what income a c꧃ompany managed to keep hold of.

Accounting earnings is very influential as it is used as a basis to determine 澳洲幸运5开奖号码历史查询:earnings per share (EPS), the most widely consulted metric for valuing stocks. EPS is calculated by taking NI minus preferred dividends, cash distributions paid to the owners of a company's preferred shares, and then dividing the number by average 澳洲幸运5开奖号码历史查询:outstanding common shares. The resulting figur♚e shows how much money a company🌌 makes for each share of its stock.

Accounting Earnings vs. Economic Earnings

Like accounting earnings, economic earnings deducts explicit costs from revenue. Where they differ is that economic profit also strips away 澳洲幸运5开奖号码历史查询:implicit costs, the various 澳洲幸运5开奖号码历史查询:opportunity costs,🐲 or benefits missed out on when choosing one alternative ov♔er another, a company incurs when allocating resources elsewhere.

Because economic earnings focus on all financial information available, many believe that they are a better gauge of 澳洲幸运5开奖号码历史查询:profitability and provide a more accurate representation of the true underlying 澳洲幸运5开奖号码历史查询:cash flows of a business than accounting earnings.

Economic earnings are not recorded on a company’s financial statements, though, nor required to be disclosed to regulators, investors, or financial institutions (FIs), so determining them can be a time consuming and complicated task. Deriving eco­nomic earn­ings from account­ing earnings, and closing loopholes within GAAP accounting, requires extract­ing items from the 澳洲幸运5开奖号码历史查询:footnoꦍtes to the financial state🌠ments and the 澳洲幸运5开奖号码历史查询:management discussion and analysis (MD&A).

Other popular methods to measure a company’s underlying profitability include 澳洲幸运5开奖号码历史查询:discounted cash flow (DCF) analysis, the 澳洲幸运5开奖号码历史查询:internal rate of return (IRR) — sometiꦕmes referred to as the "economic rate of return"🔴 — economic value added (EVA) and return on invested capital (ROIC).

Special Considerations

Accounting earnings, like other accounting measures, are susceptible to manipulation. For instance, companies may engage in aggressive 澳洲幸运5开奖号码历史查询:revenue recognition tactics, recording sales prematurely, or hide expenses. They might also seek to minimize their accounting earnings to reduce their 澳洲幸运5开奖号码历史查询:tax liabilities.

These common practices mean that investors who base decisions on accounting earnings should not always take all the numbers presented in financial statements at face value. Companies are required by law to follow certain accounting standards. However, some leeway is provided too, making it sometimes possible to deflate or inflate earnings tﷺo meet certain objectives.

It's also worth bearing in mind that accounting earnings can be skewed by unusual and irregular one-time, 澳洲幸运5开奖号码历史查询:nonrecurring events, such as the sale of a business division, 澳洲幸运5开奖号码历史查询:restructuring costs or l💜egal fees, that have nothing to do with everyday business operations.