| YOU WILL LEARN...
1. To define the concept of income.
Income is a return over and above the investment of the owners.
Two concepts can be used to measure well-offness: financial capital
maintenance and physical capital maintenance.
2. To explain why an income measure is important.
The recognition, measurement, and reporting of income is considered to be
among the most important tasks performed by accountants.
These measures are used to make business and economic decisions that
result in the allocation of resources.
3. To explain how income is measured, including the revenue recognition and
expense-matching concepts. The basic explanation is:
Income is measured as the difference between resource inflows and outflows
over a period of time.
Revenues are recognized when the earnings process is substantially
Expenses are matched against revenues directly or are immediately
recognized as a period expense.
4. To understand the format of an income statement. Remember:
The income statement may be presented in a single- or multiple-step form.
Regardless of the form, irregular and extraordinary items are disclosed
separately to determine net income.
5. To describe the specific components of an income statement. They include:
Most companies will report on some or all of the following income statement
Net sales, cost of goods sold, gross profit, operating expenses, operating
income, other revenues and gains, other expenses and losses, income
from continuing operations before income taxes, income taxes on
continuing operations, income from continuing operations, discontinued
operations, extraordinary items, and cumulative effect of changes in
6. To compute comprehensive income and prepare a statement of stockholders’
equity. Some helpful facts to keep in mind:
Comprehensive income reflects all changes in equity during a period except
those resulting from investments by owners and distributions to owners.
Comprehensive income is the number used to reflect an overall measure of
change in a company’s wealth during the period.
7. To construct simple forecasts of income for future periods.
An important use of an income statement is to forecast income in future
Most financial statement forecasts start with a forecast of sales. Many
expenses maintain a constant relationship with sales.
| IMPORTANT POINTS
Conceptual Framework of Income Measurement
An important objective of this chapter is to introduce a conceptual approach to
alternative income measurement theories. Review the capital maintenance and
transactions approaches as alternatives. Also, remember that the FASB must make
choices among alternative theories or schools of thought. Finally, understand that
income measurement principles that are currently GAAP are only compromises of the
attributes of relevance and verifiability.
Income Measurement and Objectives of Financial Reporting
You will better understand the underlying rationale of income measurement if you relate
elements of income to the objective of providing information for assessing cash flow
prospects—amount, timing, and uncertainty. Specifically pay attention to the
information content of elements such as operating and other income, extraordinary
items, discontinued segments, cumulative effects of accounting changes, and prior