Session 4 - Income Concepts and Income Statement Presentation

Question 1

Income is used

Answer 1

• as the basis of one of the principal forms of taxation.
• in public reports as a measure of the success of a corporation’s operations.
• as a criterion for the determination of the availability of dividends.
• by rate-regulating authorities for investigating whether those rates are fair and reasonable.
• as a guide to management of an enterprise in the conduct of its affairs.

Question 2

Financial Capital Maintenance

Answer 2

• Money Amount
• Transactions Based
• Holding gains & losses are included in income under financial capital maintenance
• Commonly Used

Sales - Cost - Investment

Question 3

Physical Capital Maintenance

Answer 3

• Productive Capacity

The major strength of the physical capital maintenance concept is based on the notion that an increase in enterprise wealth as a result of price changes is excluded from income.

Question 4

Current Value Accounting

Answer 4

The concept of physical capital maintenance requires assets and liabilities to be stated at their current values

• Entry price or replacement cost
• Exit value or selling price
• Discounted present value

Question 5

Entry Price or Replacement Cost

Answer 5

Replacement cost
Assets stated at COST to replace them

Income determining by matching revenues against current cost of replacing operating assets

Question 6

Exit Value or Selling Price

Answer 6

Selling Price

• Assets stated at anticipated disposal price
• Holding gains and losses receive immediate recognition under exit values

Question 7

Discounted Present Value

Answer 7

Relevant value on balance sheet:

• PV of future cash flows expected to be received from asset
• PV of future cash flows expected to be disbursed for a liability

*Selection of appropriate discount rate (pension obligations)

Question 8

Income Statement Format

Answer 8

Two views:
(a) Current operating performance
(b) All-inclusive income
Net income falls in between these two points

Question 9

Current Operating Performance

Answer 9

Under this view, only changes and events under the control of management that result from Current Period Decisions should be included in income

Also, current operating performance has greater predictive value than earnings that includes items that belong to other periods.

*Excludes Prior-period adjustments

Question 10

All-Inclusive Concept of Income

Answer 10

Under this view, net income would reflect All Items that affected the Net Increase or Decrease in Equity during the accounting period, with the exception of capital transactions (investments by owners and distributions to owners)

All-inclusive income is more transparent than the current operating earnings because everything is clearly disclosed in the income statement and minimizes bias in income reporting.

• Other Comprehensive Income
• AOCI - Included in Equity