Accounting Info

Accounting Info - Dr. M. D. Chase Accounting 300A 11-A I....

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Dr. M. D. Chase Long Beach State University Accounting 300A 11-A Income Statement Page 1 I. PURPOSE OF INCOME MEASUREMENT A. In general accountants measure income to assess the effectiveness of operations as they relate to the goal(s) of an enterprise. More specifically, income measurement is used to: 1. c ompute return on investment, 2. evaluate the past performance of the enterprise, 3. provide a basis for predicting future performance. 4. serve as a motivator for improved managerial performance, 5. help assess the risk or uncertainty of achieving future cash flows 6. measure changes in the "efficiency" of the enterprise, 7. report on operating effectiveness for external and internal purposes, 8. provide a means of evaluating the performance of competing investment opportunities for both investors and stockholders 9. meet the information needs of regulatory and taxing agencies. II. TYPES OF INCOME A. In his book The theory of Interest economist Irving Fisher identified three types of income: 1. Psychic or enjoyment income , consisting of agreeable sensations and experiences; 2. Real income as measured by what money will buy, i.e., in terms of purchasing power or effectiveness. 3. Money income , consisting of the money available for purchasing. a. Accountants deal with this third concept of income b. Traditionally, the accounting system has measured only this type of income for financial reporting purposes. But efforts are being made to extend income measurement to category (2) for financial reporting purposes, as illustrated by the progress toward price-level accounting. c. This external effort toward measuring real income is matched by the increasing emphasis that is being given to costeffectiveness effectiveness in internal management. III. INCOME MEASUREMENT AND ACCOUNTING A. Problems with accounting income measurement 1.The process of income measurement is elusive and presents an ever-present challenge. a. Income that cannot be measured reliably are not reported in the income statement. 2.Measurement is the assignment of numerical values to events to some rule or standard. a. Measurement involves judgement and is subject to evaluation by both management and auditor. 3.The assignment of numerals to economic transactions is the principal function of accounting. a. There are often different methods of assigning (computing) the value of economic transactions. b. Accounting/Income measurement is not an exact science 4.In most cases these numerals are in the form of money values. a. The aggregation of these values is used measure the wealth and income of businesses and individuals. b. From these assessments of wealth and income, policy makers control the distribution of economic resources through taxation and other means. c.
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This note was uploaded on 09/21/2010 for the course ACCT 2402 taught by Professor Riddles during the Spring '10 term at San Jacinto.

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Accounting Info - Dr. M. D. Chase Accounting 300A 11-A I....

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