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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

Stacy Corporation had income from operations of \(7,200,000. In addition, it suffered an unusual and infrequent pretax loss of \)770,000 from a volcano eruption, interest revenue of \(17,000, and a write-down on buildings of \)53,000. The corporation's tax rate is 30%. Prepare a partial income statement for Stacy beginning with income from operations. The corporation had 5,000,000 shares of common stock outstanding during 2017.

How can information based on past transactions be used to predict future cash flows?

C.Reither Co. reports the following information for 2017: sales revenue \(700,000, cost of goods sold \)500,000, operating expenses \(80,000, and an unrealized holding loss on available-for-sale securities for 2017 of \)60,000. It declared and paid a cash dividend of \(10,000 in 2017. C Reither Co. has January 1, 2017, balances in common stock \)350,000; accumulated other comprehensive income \(80,000; and retained earnings \)90,000. It issued no stock during 2017.

Instructions

Prepare a statement of stockholders’ equity.

Which of the following statements is correct regarding income reporting under IFRS?

(a) IFRS does not permit revaluation of property, plant, equipment, and intangible assets.

(b) IFRS provides the same options for reporting comprehensive income as GAAP.

(c) Companies must classify expenses by nature.

(d) IFRS provides a definition for all items presented in the income statement.

(Multiple-Step Statement, Retained Earnings Statement) The following information is related to Dickinson Company for 2017.

Retained earnings balance, January 1, 2017 \(980,000

Sales revenue 25,000,000

Cost of goods sold 16,000,000

Interest revenue 70,000

Selling and administrative expenses 4,700,000

Write-off of goodwill 820,000

Income taxes for 2017 1,244,000

Gain on the sale of investments 110,000

Loss due to flood damage 390,000

Loss on the disposition of the wholesale division (net of tax) 440,000

Loss on operations of the wholesale division (net of tax) 90,000XXX

Dividends declared on common stock \)250,000

Dividends declared on preferred stock 80,000

Dickinson Company decided to discontinue its entire wholesale operations (considered a discontinued operation) and to retain its manufacturing operations. On September 15, Dickinson sold the wholesale operations to Rogers Company. During 2017, there were 500,000 shares of common stock outstanding all year.

Instructions

Prepare a multiple-step income statement and a retained earnings statement.
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