Financial Reporting Summary

The purpose of this website is to examine the implications for financial reporting of three concepts-capital, value and income. Two meanings may be attached to the concept of capital. First, capital may be seen as the totality of enterprise assets which give rise to income. Second, capital may be seen as the investment made by shareholders in the equity of the enterprise and from which they expect to derive income in the form of dividends. Investors are concerned not only with the interdependence of the value of their shareholdings and the value of enterprise assets, but also with maintaining the value of that capital. The value of capital and the measurement of income are also interdependent in the sense that income is the difference between the value of capital at two points in time. Therefore, a central issue in the measurement of periodic income is the notion of capital maintenance. Difficulties arise in reporting income due to the different concepts of capital maintenance.

Further problems arise in financial reporting from the application of different valuation concepts to asset valuations. The combination of different capital maintenance and asset valuation concepts lies at the heart of much of the controversy in financial reporting. The problem of selecting a financial reporting framework requires the evaluation of alternative accounting valuation systems in terms of criteria of relevance and feasibility.

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Read on: The Objectives of Income Measurement

The objectives of income measurement

Income as a measure of efficiency

Income is used as a measure of efficiency in two senses. First, the overall efficiency of a business is assessed in terms of the income generated. Hence, income tends to provide the basic standard by which success is measured There are clearly problems in focusing upon financial efficiency to the detriment of other concepts of business efficiency-such as its effectiveness as a social unit and its efficiency in developing and using new ideas and processes. Nevertheless, those who support the use of income as... see: The Objectives of Income Measurement