Income
Determination-General ConceptsIncome
Determination-General Concepts| Economic Income—The general economic concept of income was defined by Sir John Hicks (1946) as “…The amount which a man [woman] can consume during a period of time and still remain as well off at the end of the period as he [she] was at the beginning…” |
| OBJECTIVES OF INCOME REPORTING |
| To distinguish between capital and income |
| To provide a measure of management efficiency |
| To serve as an aid to predicting the future course of the business |
| To serve as an aid in managerial decision-making |
NET INCOME TO WHOM?
| Income concept | Income Included | Income recipients |
| Value added | Selling price of firm's product less cost of goods and services acquired by transfer. | All employees, owners, creditors, and governments. |
| Enterprise income | Excess of revenues over expenses; all gains and losses. Expenses do not include interest charges, income taxes, and true profit-sharing distributions. | Stockholders, bondholders, and governments. |
| Income to investors | Same as enterprises income, but after deducting income taxes. | Stockholders and holders of long term debt. |
| Income to shareholders | income to investors less interest charges and profit-sharing distributions. | Stockholders, preferred and common. |
| Income to residual equity holders. | Income to shareholders less preferred dividends. | Current and potential common stockholders ... |
| Income to the firm | Income to residual equity holders less common dividends | The firm (owned by common stockholders) |
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| Capitalization approach-- | |
| Market Valuation approach | |
| Current Cash Equivalents | |
| Input Prices | |
| Historical | |
| Current | |
| Maintenance of Constant Purchasing Power | |
| All capital maintenance approaches to income measurement involve a measurement of net assets of a firm at the beginning and end of a period. The change in the net assets from beginning to end of a period, after adjusting for capital transactions, represents the income for the period. |
| The various approaches to the capital maintenance concept of income involve different methods of measuring the net assets. This measurement process is the major difficulty of the capital maintenance concept. |
| All capital maintenance approaches have the disadvantage of being unable to provide information about the specific operating activities of the firm. For example, there is no information about the volume of revenues and expenses, nor information about the types of revenues or expenses. |
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| Sales of goods and services |
| Purchases of goods and services |
| Cash receipts and cash disbursements |
| Incurrence of receivables and payables |
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| reflection of contractual obligations |
| reflection of obligations imposed by law |
| reflection of expiration of asset costs |
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