What Are Accounting Earnings?

Accounting earnings, another name for a company’s stated earnings, or 澳洲幸运5官方开奖结果体彩网:net income (NI), are calculated by sub𓃲tracting business expenditures, including cost of goods sold (COGS), general and administrative expenses (G&As), depreciation, interest, and taxes, fro🌟m revenue. In effect, it shows the amount of money a company has left over after deducting the explicit costs of running the business.

Accounting earnings should not be confused with 澳洲幸运5官方开奖结果体彩网:economic earnings, which measure the actu🍸al profitability of꧒ 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💜 investors and analysts to gauge performance and evaluate the health of stocks listed on e🤡xchanges.

The problem is that companies often publish various versions of profit, or earnings, in their 澳洲幸运5官方开奖结果体彩网:financial statements. Some of these figures conform to 澳洲幸运5官方开奖结果体彩网:generally accepted accountin🍸g practices (GAAP). Othಞers are creative interpretations put together by management and their accountants.

Accounting earnings, the bottom line of the 澳洲幸运5官方开奖结果体彩网: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官方开奖结果体彩网:accounting period. At the end it tallies all of this up, presenting investors with a snapshot of w🏅hat income a company managed to keep hold of.

Accounting earnings is very influential as it is used as a basis to determine 澳洲幸运5官方开奖结果体彩网: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官方开奖结果体彩网: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官方开奖结果体彩网:implicit costs, the various 澳洲幸运5官方开奖结果体彩网:opportunity costs, or benefits miss𒁏ed out on when choosing🦩 one alternative over 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官方开奖结果体彩网:profitability and provide a more accurate representation of the true underlying 澳洲幸运5官方开奖结果体彩网: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官方开奖结果体彩网:footnotes to the🍌 financial statements and the 澳洲幸运5官方开奖结果体彩网:management discussion and analysis (MD&A).

Other popular methods to measure a company’s underlying profitability include 澳洲幸运5官方开奖结果体彩网:discounted cash flow (DCF) analysis, the 澳洲幸运5官方开奖结果体彩网:internal rate of return (IRR) — sometimes 💧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官方开奖结果体彩网: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官方开奖结果体彩网: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 to meet cꦚertain 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官方开奖结果体彩网:nonrecurring events, such as the sale of a business division, 澳洲幸运5官方开奖结果体彩网:restructuring costs or legal fees, that have nothi🌜ng to do 🔯with everyday business operations.