Income measurement Concepts Accounting Income consists of Permanent Component--the recurring component expected to persist indefinitely Transitory Component--the transitory (or non- recurring) component not expected to persist (Note: The concept of economic income includes both permanent and transitory components. Value Irrelevant Component--value irrelevant components have no economic content; they are accounting distortions
Accounting Income consists of: • Permanent Component--the recurring component expected to persist indefinitely • Transitory Component--the transitory (or non- recurring) component not expected to persist (Note: The concept of economic income includes both permanent and transitory components.) • Value Irrelevant Component--value irrelevant components have no economic content; they are accounting distortions Income Measurement Concepts
Income measurement Concepts Analysis Implications E Adjusting accounting income is important task Necessary to specify analysis objectives--e.., determining economic income or permanent income or sustainable earning power Adopt an inclusive approach- including recurring and non-recurring components
Analysis Implications : • Adjusting accounting income is important task • Necessary to specify analysis objectives--e.g., determining economic income or permanent income or sustainable earning power • Adopt an inclusive approach— including recurring and non-recurring components Income Measurement Concepts
Income measurement Measurement Two main components of accounting Revenues(gains) Expenses ( losses)
Income Measurement Measurement Two main components of accounting income: Revenues (gains) Expenses (losses)
Income measurement Measurement Sample Income Statement Amber Corp, and subsldlarles $14,314 12,716 $13033 Equity income 51 Cost of goods sold 8333) 7.567 (8001) Gross profit $6,044 $5090 elling and administrative (2478) Research and development (1234) (85 Restructuring charge (1016) Interest expense (725 (715 Income before taxes $1,121 s154 s1,185 Income taxes (356 Income from continuing operations 785 s830 Gain from extinguishment of debt Loss from operating discontinued segment Gain from sale of discontinued segment Net 82 s(197 873 Foreign currency translation adjustments (31) Unrealized holding gains on available-for-sale securities Additional minimum pension liability adjustment Comprehensive income $929 s(233)
Sample Income Statement Income Measurement Measurement Amber Corp. and Subsidiaries 2001 Sales $14,314 $12,716 $13,033 Equity income 51 39 43 Interest income 12 74 15 Cost of goods sold (8,333) (7,567) (8,001) Gross profit $ 6,044 $5,262 $ 5,090 Expenses: Selling and administrative $(2,964) $(2,478) $(2,396) Research and development (1234) (899) (855) Restructuring charge -- (1016) -- Interest expense (725) (715) (654) Income before taxes $ 1,121 $ 154 $ 1,185 Income taxes (336) (351) (356) Income from continuing operations $ 785 $ (197) $ 830 Gain from extinguishment of debt 38 -- -- Loss from operating discontinued segment -- 0 (23) Gain from sale of discontinued segment -- -- 66 Net income $ 823 $ (197) $ 873 Foreign currency translation adjustments 82 (54) (31) Unrealized holding gains on available-for-sale securities 24 22 6 Additional minimum pension liability adjustment 0 (4) -- Comprehensive income $ 929 $ (233) $ 848 2000 1999
Income measurement Measurement Revenues and Gains Revenues are earned inflows or prospective inflows of cash from operations Gains are recognized inflows or prospective inflows of cash from non-operations * x x Revenues are expected to recur **Gains are non-recurring
Revenues and Gains • Revenues are earned inflows or prospective inflows of cash from operations* • Gains are recognized inflows or prospective inflows of cash from non-operations** * Revenues are expected to recur **Gains are non-recurring Income Measurement Measurement