Income Concepts

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INCOME CONCEPTS
The Purpose of Income Reporting
Income is used…
1As the basis of one of the principal forms of taxation.
2In public reports as a measure of the success of a corporation’s operations. 3As a criterion for the determination of the availability of dividends. 4By rate-regulating authorities for investigating whether those rates are fair and reasonable. 5As a guide to trustees charged with distributing income to a life tenant while preserving the principal for a remainder man. 6As a guide to management of an enterprise in the conduct of its affairs. Importance of Income Reporting

The EMH and stock prices
Economic Vs. Accounting Income
Related sciences
concerned with the activities of business firms
use similar variables
differences over the timing and measurement of income
Relative importance of income statement (accounting) and balance sheet (economics) What is the Nature of Income?
Three possibilities
Psychic
Satisfaction of human wants
Real
Increase in economic wealth
Money
Increases in monetary value
The concept of well-offness or capital maintenance
Problems
Because of the difficulties in measuring real income - Accountants have adopted a transactions approach to income recognition Capital Maintenance Concepts
Financial capital maintenance - money amount -transactions based VS
Physical capital maintenance - productive capacity
Difference is in the treatment of holding gains
Current Value Accounting
The concept of physical capital maintenance requires assets and liabilities to be stated at their current values Approaches:
1Entry price or replacement cost
1Exit value or selling price
1Discounted present value
Income Recognition
Criticisms of the transactions approach
Possible alternatives
Edwards and Bell
1Current operating profit
1Realizable cost savings
1Realized cost savings
1Realized...
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