Income and Revenue

8/11/2019 Income and Revenue

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Income Concept and RevenueVilgia Delarhoza ( 1110534016 )

Hanna Deseasari ( 1110534003 )


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The Purpose of Income Reporting

Income is used 1. as the basis of one of the principal forms of taxation.2. in public reports as a measure of the success of a corporations

operations.3. as a criterion for the determination of the availability of dividends.4. by rate-regulating authorities for investigating whether those rates are

fair and reasonable.5. as a guide to trustees charged with distributing income to a life tenant

while preserving the principal for a remainderman.6. as a guide to management of an enterprise in the conduct of its affairs.


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Importance of Income Reporting

The EMH and stock prices Economic Vs. Accounting Income

Related sciences concerned with the activities of business firms use similar variables differences over the timing and measurement of income

Relative importance of income statement (accounting) andbalance sheet (economics)


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The Nature of Income

Three possibilities Psychic

Satisfaction of human wants

Real Increase in economic wealth

Money Increases in monetary value

The concept of well-offness or capital maintenance

Problems Because of the difficulties in measuring real income - Accountants have

adopted a transactions approach to income recognition


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Capital Maintenance Concepts

Financialcapital

maintenance -money

amount -transactionsbased

Physical capital maintenance -

productive

capacity

Difference is in the treatment of holding gains


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Current Value Accounting

The concept of physical capital maintenancerequires assets and liabilities to be stated attheir current values

Approaches:1 Entry price or replacement cost

2 Exit value or selling price

3 Discounted present value


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Income Recognition

Criticisms of the transactions approach Possible alternatives

Edwards and Bell1 Current operating profit

2 Realizable cost savings

3 Realized cost savings

4 Realized capital gains

Sprouse

The concept of measurable change


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Accounting for Inflation

Instability of the accountingmeasuring unit is due to the

effects of inflation ordeflation General purchasing power

adjustments


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Revenue Recognition

The income producing activities cycle Revenue recognition criteria

1. The revenue has been earned2. The revenue has been realized or is realizable

SAB No. 101 criteria1. Persuasive evidence of an arrangement exists2. Delivery has occurred3. The vendors fee is fixed or determinable4. Collectibility is probable.

Recognition Realization


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Matching

Cost

Leads to or

Results In

Asset

Used upResulting in

Revenue

Used up Resultingin No Revenue

Expense Loss


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Earnings Quality, Earnings Management andFraudulent Financial Reporting

Assessing earnings quality:1 Compare the accounting principles employed by the

company with those generally used in the industry andby competitions.

Do the principles used by the company inflate earnings?2 Review recent changes in accounting principles and

changes in estimates to determine if they inflateearnings.

3 Determine if discretionary expenditures,such as advertising, have been postponed

by comparing them to previous periods.4 Attempt to assess whether some expenses, such aswarranty expense, are not reflected on the incomestatement.


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5 Determine the replacementcost of inventories and otherassets. Assess whether thecompany generating sufficientcash flow to replace its assets?

6 Review the notes to financialstatements to determine if losscontingencies exist that mightreduce future earnings andcash flows. 7 Review the relationship between sales

and receivables to determine ifreceivables are increasing morerapidly than sales.

8 Review the management discussionand analysis section of the annualreport and the auditor's opinion todetermine management's opinion ofthe company's future and to identifyany major accounting issues


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Earnings management The attempt to influence short-term reported income

Arthur Levitt has outlined five earnings management

techniques that he described as threatening the integrity offinancial reporting :

1. Taking a bath2. Creative acquisition accounting

3. Cookie jar reserves4. Abusing the materiality concept5. Improper revenue recognition


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Distinction Between Conservative, Neutral,Aggressive and Fraudulent Earnings Management

1. Conservative accounting

2. Neutralearnings

3. Aggressive accounting

4. Fraudulent accounting

Overly aggressive recognition of loss orreserve provisions

Overvaluation of acquired in process researchand development activities

Earnings that result from using a neutralperspective

Understating loss or reserve provisions

Recording sales before they satisfy the earnedand measurability criteria

Recording fictitious sales

Backdating sales invoices

Overstating inventory

Income and Revenue

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