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The Nature of Income measurements

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Introduction

University Of Hertfordshire De Havilland Business School Module Title: Financial Reporting and Analysis Module (course) Code: MBSP 00o5 Module Tutor: Jane Waksman Academic Year: Semester B-2004 Financial Reporting and Analysis Title: The Nature of Income measurements Word count: 1,864 By ZhenZheng MAO 03058775 Hand in Date: 30th -Apr-2004 To discuss whether the financial statements are usefulness, the most important criteria are whether they can provide useful information to the users (Scott 2003). Theory and practice of financial reporting are typically centered on the notion of income measurement. However, Beaver and Demski (1979) argued that income measurement exists in a world of complete and perfect markets, but not necessarily otherwise. Thus, the financial statements will be little useful in the real world since they are more centered on the income measurement. According to the FASB's conceptual framework, the primary purpose of financial statements is to provide information to some defined class of users, and financial statement must communicate useful information to the market, not just to existing investors in the firm. There is another important purpose of financial statements, which is future-oriented, is to provide the information to help investors estimate future payoffs. ...read more.

Middle

He introduces the present value concept, present values replace the balance sheet values of net assets adopted by the accountant. The economic value of the business at each certain point will be based on the discounted cash flow of the future years. It can be seen that the difference between accounting and economic capital is one of measurement. As Boulding (1962) points out; whereas accountants measure capital in terms of actualities as the by-product of the income measurement process, economists measure it in terms of potentialities in order to measure economic income. However, in the real worlds, the economic income is suitable. Since, in a dynamic economy, values are changing both because prices and expectations are changing, this income cannot be computed objectively and therefore is impractical for business. Predicting the amount and timing of cash flows and choice of an appropriate discount rate approximating the entity's opportunity cost presents considerable problems (Alexander (1977). To explore the nature of income measurement, Beaver and Demski (1979) adopt a fundamental measurement perspective. Fundamental measurement relates the idea that shareholders are unanimity to agree on "more income is better than less". Where income is measured under economic concept, which can provide useful information for individual shareholders to rank alternative production plans for the various firms in the economy. ...read more.

Conclusion

Reference: Alexander, S.S. "Income Measurement in a Dynamic Economy", (Revised by D. Solomons) in Baxter and Davidson (eds), Studies in Accounting Theory, ICAEW:1977. Beaver, W. and J. Demski, (1979), "On the nature of Income Measurement," The Accounting Review, January, Vol. LIV. No.1, pp.38-46. Boulding, K. (1962), "Economics and Accounting: the Uncongenial Twins", in Baxter and Davidson (eds), Studies in Accounting Theory, Sweet and Maxwell, 1962 pp44-55. Elliott, B. and J. Elliott, (2002), Financial Accounting and Reporting. 6th ed., Prentice Hall. England. Fisher,I., (1930),The Theory of Interest ,Macmillan,New York. Grinyer, J. R. and I. W. Symon (1980), "Maintenance of Capital Intact: An Unnecessary Abstraction?" Accounting and Business Research, AUTUNMN, PP403-413. Hicks,J.R., (1946),Value and Capital:An Inquiry into some Fundamental Principles of Economic Theory ,Clarendon Press,Oxford. Lee, T.A. (1985), Income and Value Measurement: Theory and Practice, Wokingham,England: Van Nostrand Reinhold (UK) Co. Ltd, 3rd Edition, 1985. James,S., (2002),"The Future International Tax Environment ",in A.Lymer and J. Hasseldine (eds.)The International Taxation System, Kluwer Academic Publishers, Boston, pp.105-119. Ohlson, J. A., (1987), "On the nature of income measurement: The basic results". Contemporary Accounting Research (Autumn): 1-15. Scott, W., (2003), Financial Accounting Theory. 3rd ed., Prentice Hall. England. Solomons, D. (1961) "Economics and Accounting Concept of Income", The Accounting Review, Vol 36, July 1961, pp 374-383. 1 ...read more.

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