Question A

The current operating performance concept of income is used to measure direct investment income. This concept emphasizes that only ordinary, normal, recurring results of operations of the current period ought to be included in an organization’s net income while developing the income statement. Nonrecurring and extraordinary losses or gains are normally excluded from the income and reported in the statement of retained earnings. This is because the gains and losses are usually taken directly to equity and bypass the income statement.

Question B

As defined in SFAC No. 5, earnings are consistent with the current operating performance concept of income because earnings is a measure of performance for a given period that focuses primarily on the extent to which asset inflows that are associated with cash-to-cash cycles completed during that period exceed or are less compared to the asset outflows within the same cycle. Earnings tend to focus on what an entity has received or is reasonably expecting to receive for output (revenues) and the sacrifices made to produce and distribute this output (expenses). Earnings also include gains and losses.

Question C

The all-inclusive concept of income is sometimes regarded as the “clean surplus.” Under this concept, net income reflects all the items that affect the net decrease or increase in the stockholder’s equity during the period apart from dividends and capital transactions. The concept allows for the inclusion of all the items, including nonrecurring and extraordinary gains and losses in the income statement. Advocates of this concept argue that it enables to avoid biased reporting since the management is not at liberty to choose what to report in the income statement.

Question D

Comprehensive income is consistent with the all-inclusive concept of income since according to FASB, comprehensive income encompasses a change during a period in an entity’s equity from transactions and events from non-owner sources that include all changes in equity except those resulting from distribution by owners and investments by owners. It is normally equal to revenues plus gains minus losses and minus expenses.

Question E

Comprehensive income is consistent with the financial capital maintenance concept since it includes all the reported items affecting the net assets during the accounting period. It normally does not follow historical costs strictly, but it includes holding losses and gains in the computation of income. The excess amount in both cases is treated as profit.

Question F

The physical capital maintenance assumes that an entity has income when the physical productive capacity of the entity at the end of the period exceeds that at the beginning after excluding the effects of the transactions with owners. In physical capital maintenance concept, matching concepts strives to match historical and current costs with revenue to get a measure of periodic net income. The changes that might occur are those of maintaining an entity’s operating assets at a constant physical level and price changes. An example is when a business has annual revenue of $400,000, and typical costs are $200,000. If the cost were to rise to $300,000, this would cut into the annual profits. There is the need to raise the business revenue to $500,000 to help maintain a similar level of profitability.

 
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