ch05 teori akun

7/27/2019 ch05 teori akun

1/26

CHAPTER 5

INCOME CONCEPTS


2/26

The Purpose of IncomeReporting

Income is used1 as the basis of one of the principal forms of taxation.

1 in public reports as a measure of the success of a corporationsoperations.

1 as a criterion for the determination of the availability of dividends.1 by rate-regulating authorities for investigating whether those rates are

fair and reasonable.

1 as a guide to trustees charged with distributing income to a life tenantwhile preserving the principal for a remainderman.

1 as a guide to management of an enterprise in the conduct of its affairs.


3/26

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) and

balance sheet (economics)

Incom

e

Statem

ent

BalanceSheet


4/26

In an Attempt toReconcile

What is thenature of

income?

When shouldincome be

reported?


5/26

What is the Nature ofIncome?

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


6/26

Capital MaintenanceConcepts

Financial

capital

maintenance

- money

amount-transaction

s based

Physicalcapital

maintenance

- productivecapacity

Difference is in the treatment of holding gains

VS


7/26

Current ValueAccounting

The concept of physical capital maintenance

requires assets and liabilities to be stated at

their current values

Approaches:1Entry price or replacement cost

1Exit value or selling price

1Discounted present value


8/26

Income Recognition

Criticisms of the transactions approach

Possible alternatives

Edwards and Bell Current operating profit

Realizable cost savings

Realized cost savings

Realized capital gains

Sprouse

The concept of measurable change


9/26

Measurement

What is measurement?

Problems with the measurement unitArbitrary decisions


10/26

Accounting for Inflation

Instability of the accounting

measuring unit is due to the

effects of inflation or

deflation

General purchasing power

adjustments


11/26

Revenue Recognition

The income producing activities cycle Revenue recognition criteria

1. The revenue has been earned

2. 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 RealizationVS


12/26

Revenue Recognition

The crucial event test

As a result revenue is generally recognized atthe point of sale

may be advanced or delayed due to surroundingcircumstances

1During production1At close of production1

Services performed1Cash1Occurrence of some event5 Special recognition circumstances


13/26

Recent Developments

FASB-IASB Short-term InternationalConvergence Project

Conflicts in SFAC Nos. 5 and 6

Practical and conceptual reasons to addressrevenue recognition

Project approach based on changes in assetsand liabilities consistent with SFAC No. 6

SEC Staff Accounting Bulletin No. 101


14/26

Recent Developments: OtherIssues

Delayed or advanced revenue recognition

Revenue recognized

During production processAt completion of productionAs services are performedAs cash is received

On occurrence of some event


15/26

Matching

Cost

Loss

Expense

Product

VS PeriodCosts


16/26

Matching

Cost

Leads to or

Results In

Asset

Used upResulting in

Revenue

Used upResulting in No

Revenue

Expense Loss


17/26

Concepts Affecting RevenueRecognition

Conservatism

Materiality

Earnings Qualit Earnings


18/26

Earnings Quality, EarningsManagement and Fraudulent

Financial Reporting

Earnings quality The correlation between a companys

accounting and economic income

The existence of the previously discussed issues has

led some to the conclusion that economic income is a

better predictor of cash flows.

Assessing earnings quality


19/26

Earnings Quality, EarningsManagement and FraudulentFinancial Reporting Assessing earnings quality:

1 Compare the accounting principles employed by thecompany with those generally used in the industryand by competitions.

1 Do the principles used by the company inflate earnings?

1 Review recent changes in accounting principles andchanges in estimates to determine if they inflateearnings.

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

by comparing them to previous periods.1Attempt to assess whether some expenses, such as

warranty expense, are not reflected on the incomestatement.


20/26

5 Determine the replacementcost of inventories and otherassets. Assess whether thecompany generatingsufficient cash flow toreplace its assets?

1 Review the notes to financialstatements to determine ifloss contingencies exist thatmight reduce future earningsand cash flows.

,Management and FraudulentFinancial Reporting

7 Review the relationship betweensales and receivables to determineif receivables are increasing morerapidly than sales.

8 Review the managementdiscussion and analysis section ofthe annual report and the auditor'sopinion to determinemanagement's opinion of thecompany's future and to identify

any major accounting issues


21/26


Financial Reporting Earnings management

The attempt to influence short-term reported income


22/26


Financial Reporting Arthur Levitt has outlined five earnings management

techniques that he described as threatening the integrity

of financial reporting:1. Taking a bath

2. Creative acquisition accounting3. Cookie jar reserves

4. Abusing the materiality concept

5. Improper revenue recognition


23/26

Distinction Between Conservative,Neutral, Aggressive and Fraudulent

Earnings Management1. Conservativeaccounting

2. Neutral

earnings

3. Aggressive accounting

4. Fraudulent accounting

Overly aggressive recognition of loss or

reserve provisions

Overvaluation of acquired in process

research and development activities

Earnings that result from using a neutral

perspective

Understating loss or reserve provisions

Recording sales before they satisfy the

earned and measurability criteria

Recording fictitious sales

Backdating sales invoices

Overstating inventory


24/26

Red flags of possiblefraudulent reporting:

A predominantly insider board of

directors

Management compensation tied to its stock price

Frequent changes of auditors

Rapid turnover of key personnel

Deteriorating earnings

Unusually rapid growth

Lack of working capital


25/26

Red flags of possiblefraudulent reporting:

The need to increase the stock price to

meet analysts earnings projections

Extremely high levels of debt

Cash shortages

Significant off-balance sheet financing arrangements

Doubt about the companys ability to continue as a going concern

SEC or other regulatory investigations Unfavorable industry economic conditions

Suspension or delisting from a stock exchange


26/26

Copyright 2009 John Wiley & Sons, Inc. All rights reserved.

Reproduction or translation of this work beyond that permitted in

Section 117 of the 1976 United States Copyright Act without the

express written consent of the copyright owner is unlawful. Request

for further information should be addressed to the Permissions

Department, John Wiley & Sons, Inc. The purchaser may make back-

up copies for his/her own use only and not for distribution or resale.

The Publisher assumes no responsibility for errors, omissions, or

damages, caused by the use of these programs or from the use of the

information contained herein.

Prepared by Kathryn Yarbrough, MBA

End of Chapter 5

Documents

ch05 teori akun