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#cfa-level-1 #expense-recognition #reading-25-understanding-income-statement
In addition, many items of expense require the company to make estimates that can significantly affect net income. Analysis of a company’s financial statements, and particularly comparison of one company’s financial statements with those of another, requires an understanding of differences in these estimates and their potential impact.
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4.3. Implications for Financial Analysis
13; As with revenue recognition policies, a company’s choice of expense recognition can be characterized by its relative conservatism. A policy that results in recognition of expenses later rather than sooner is considered less conservative. <span>In addition, many items of expense require the company to make estimates that can significantly affect net income. Analysis of a company’s financial statements, and particularly comparison of one company’s financial statements with those of another, requires an understanding of differences in these estimates and their potential impact. If, for example, a company shows a significant year-to-year change in its estimates of uncollectible accounts as a percentage of sales, warranty expenses as a percentage of


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