Elliott - Chapter 6 - Income and asset measurement - economist

Question 1

Act making financial reporting income-orientated?

Answer 1

Income Act 1929

Question 2

What are the 4 main objectives of income measurement?

Answer 2

To provide

• a means of control in a micro and macro sense
• a means of prediction
• a basis for taxation

Question 3

Income as a means of control:

Assessment of stewardship performance -

Answer 3

Managers are stewards appointed by shareholders. Net income/profit is a crystallisation of their accountability.
EPS can tie directors of firm to performance
Highly related to PE ratio

Question 4

Income as a means of control: types of performance

Answer 4

Actual vs predicted performance

Question 5

What are the 3 main characteristics of historical cost accounting?

Answer 5

• Objectivity. Predominately objective system, with aspects of subjectivity, but grounded on documentary evidence e.g. invoices
• Factual. As a basis of fact, it is verifiable and to that extent beyond doubt.
• Profit or income concept. Constitutes the difference between revenue and expenditure - or in economic sense - dif between opening and closing net assets

Question 6

Disadvantages of historical costs (3)

Answer 6

• Not always objective, owing to alternative definitions of revenue and costs and need for estimates. FIFO LIFO etc
• Estimation is needed in the case of inventory valuation - bad debts etc
• Assets often subject to revaluation

Question 7

What is the nature of accounting income as ex post?

Answer 7

Accounting income is defined in terms of the business entity. Excess revenue from sales over direct and allocated indirect costs incurred in achievement of sales.
Measured as numerical result of matching and accruals concepts.
Not always fully objective however due to nature of breaking up reporting into periods.

Question 8

Nature of accounting capital

Answer 8

Non-currents are not consumed in any one accounting period, but give service to a number of periods; therefore the unconsumed portions of each asset are carried forward from period to period and appear in the sofp.

Question 9

Faults: Principles of historical cost and profit realisation

Answer 9

SOFP pretends on one hard to be list of resultant costs pending allocation over future periods, and on the other a statement of current values. e.g. revaluation vs assets being depreciated