Income measurement Concepts Permanent incomes Equals stable average income that a company is expected to earn over its life Reflects a long-term focus Directly proportional to company value Often expressed by dividing permanent income by cost of capital Also called sustainable earning power, or sustainable or normalized earnings
Permanent Income* • Equals stable average income that a company is expected to earn over its life • Reflects a long-term focus • Directly proportional to company value • Often expressed by dividing permanent income by cost of capital *Also called sustainable earning power, or sustainable or normalized earnings Income Measurement Concepts
Income measurement Concepts Economic Income and permanent Income s million 0 TTTT「T「下 TT「1 13579111315171921232527293133353739414345474951 Years ermanent Income Economic Income
Economic Income and Permanent Income Income Measurement Concepts 0 1 2 3 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 Years $ Million Permanent Income Economic Income
Income measurement Concepts Accounting Concept of Income: Based on accrual accounting Capture aspects of both economic income and permanent income Suffers from measurement problems--yields accounting analysis
Accounting Concept of Income: • Based on accrual accounting • Capture aspects of both economic income and permanent income • Suffers from measurement problems—yields accounting analysis Income Measurement Concepts
Income measurement Concepts Revenue Recognition and Matching E Revenue recognition Revenues must be (1)realized or realizable, and (2)earned Costs/Expenses matched with recognized revenues Product costs--recognized when product or service sold Period costs--recognized when incurred
Revenue Recognition and Matching : Revenue recognition Revenues must be (1) realized or realizable, and (2) earned Costs/Expenses matched with recognized revenues Product costs—recognized when product or service sold Period costs--recognized when incurred Income Measurement Concepts
Income measurement Concepts Economic Income VS, Accounting Income: Economic Income and Accounting Income reflect similar concepts BUTH Accounting income is a product of the financial reporting environment--accounting standards, enforcement mechanisms, managers'incentives, etc HENCER Accounting income can diverge from economic income( yielding accounting distortions)
Economic Income vs. Accounting Income: Economic Income and Accounting Income reflect similar concepts BUT: Accounting income is a product of the financial reporting environment—accounting standards, enforcement mechanisms, managers’ incentives, etc. HENCE: Accounting income can diverge from economic income (yielding accounting distortions) Income Measurement Concepts