THE MEASUREMENT OF INCOME: DIFFERENT MEASURES FOR DIFFERENT OBJECTIVES

According to the Statement of Financial Accounting Concepts No. 1, the objectives of financial reporting are to provide information that is: (1) useful to those making investment and credit decisions who have a reasonable understanding of business and economic activities; (2) helpful to current and potential investors, creditors, and others in assessing the amounts, timing, and uncertainty of future cash flows; and (3) about economic resources, the claims to those resources, and changes in them.1 Three important features of this objective relate directly to the income statement and the measure of income. The statement focuses on supplying useful information to those who provide debt and equity capital to the firm; the information should help to predict future cash flows; and the information should reflect changes (increases or decreases) in the company's resources. No single measure of income can achieve this set of broad objectives, and income statements prepared under GAAP are designed to provide a variety of different measures of income. It is important that financial statement users understand how they differ and the situations under which each should be used.

To achieve this understanding, one must be familiar with several important definitions that appear in the Statement of Financial Accounting Concepts No. 62 Figure 13-1 contains the definitions of ten key concepts, referred to as the elements of financial ...

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