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Chapter 4: 5 (page 179)

Explain the transaction approach to measuring income. Why is the transaction approach to income measurement preferable to other ways of measuring income?

Short Answer

Expert verified

The transaction approach provides information regarding those activities that have occurred during a particular period. This approach is preferable because it includes a detailed explanation of the components.

Step by step solution

01

Meaning of Revenues

Revenue refers to the amount of money received from the business's general operations. Costs are deducted from the revenues to get the net income.

02

Explanation of transaction approach

The transaction approach includes the major components of the income statement like revenues, gains, expenses, and loss transactions. The other alternative to measuring income is the capital maintenance approach that includes only the changes in net income but not the essential elements like revenues and expenses of the income statement. Hence,the transaction approach is preferable to any other way to measure income.

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Most popular questions from this chapter

How should correction of errors be reported in the financial statements?

Starr Co. had sales revenue of \(540,000 in 2017. Other items recorded during the year were:

Cost of goods sold \)330,000

Salaries and wages expense 120,000

Income tax expense 25,000

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Other operating expenses 10,000

Unrealized gain on value of patents 20,000

Prepare a single-step income statement for Starr for 2017. Starr has 100,000 shares of stock outstanding.

Question: What is the major distinction (a) between revenues and gains and (b) between expenses and losses?

Question: Counting Crows Inc. provided the following information for the year 2017.

Retained earnings, January 1, 2017 $600,000

Administrative expenses 240,000

Selling expenses 300,000

Sales revenue 1,900,000

Cash dividends declared 80,000

Cost of goods sold 850,000

Loss on discontinued operations 110,000

Rent revenue 102,700

17,000

Income tax applicable to continuing operations 187,000

Income tax benefit applicable to loss on discontinued operations 60,500

Income tax applicable to unrealized holding

gain on available-for-sale securities 2,000

Accounting

Prepare

(a) a single-step income statement for 2017,

(b) a retained earnings statement for 2017, and

(c) a statement of comprehensive income using the two statement format. Shares outstanding during 2017 were 100,000.

Analysis

Explain how a multiple-step income statement format can provide useful information to a financial statement user.

Principles

In a recent meeting with its auditor, Counting Crows鈥� management argued that the company should be able to prepare a pro forma income statement with some one-time administrative expenses reported similar to discontinued operations. Is such reporting consistent with the qualitative characteristics of accounting information as discussed in the conceptual framework? Explain.

Explain the transaction approach to measuring income. Why is the transaction approach to income measurement preferable to other ways of measuring income?
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