THE EFFECT OF INCOME MEASUREMENT ON PROFITABILITY OF CORPORATE ORGANIZATION

ABSTRACT

The significant of income to any business entity cannot be overemphasized. Income of the residue That is available for distribution to the shareholder which ensured the maintenance of the capital (Glautieu et al 2011:430). Income is a basic and important item of financial statement that has various uses in various context. It is generally perceived as a basis for taxation and redistribution of wealth, a determination of dividend payments policies and investment and decision making guide and element of prediction (Riachi-Belkauie 2002). The choice of income measurement concepts which has a direct bearing on the operating performance reporting of an organization is informed by some factors which this paper sought out to examined. To achieve the objective of this study, opinion of selected staff of ABC transport Nigeria Ltd was sought thought the use of questionnaire and besides relevant theories and concepts were reviewed. The questionnaire were analyzed. The evidence show that the choice of accounting concepts as the prevailing income measurement concept is premised on historical cost accounting given its unconditional and long standing acceptance of this version of income by the accounting profession and the business world. This can be explained by the fact that its objectives verifiable practical and easy to understand and avoid of confusion.

Chapter One

Introduction

1.1      Background of the Study

Business are in the business of earning income. Their activities do not necessarily coincide with standard periods of time, but the business environment requires that firms report income or loss regularly. For example, owners must receive income reports every year, and the government requires corporations to pay taxes on annual income. Within the business, management uses financial statements – prepared every month or more often to monitor performance. Because of these demands, a primary objective of accounting is measuring net income in accordance with generally accepted accounting principles. Readers of financial reports who are familiar with these principles understand how the accountants defined net income and are aware of it’s strengths and weaknesses as a measurement of company performance.

Business rely on profit to buy new inventory, expand operations and finance product development. Without profit, business would stagnate and risk losing its market share to other competitors. Its share price will fall, which means its cannot rise as much money with share sales and cannot borrow from banks as easily. The goal of many businesses is to generate a profit for owners, employees and shareholders. It is therefore imperative at this point to illustrate the definition of income measurement. From accountant’s perspective, income is defined as the residual portion of revenue which is the result of subtracting total revenues generated from the total expenses incurred by the company during the revenue generation phase. An economist though would beg to differ, by defining income in  terms of residual expected cash flows available from consumption, after dividend and equity appreciation has been taken into account although the accountants and the economists view of the income concepts differ, in that one deals with historical values and the other in future expected cash flows, its importance is of vital use. Effectively, management has been entrusted with funds from various sources (shareholders, financial etc) to appreciate its value, and as such. Income is an effective indicator of measuring that. Management’s stewardship on its operating effectiveness of working capital may be best monitored by charting a company’s income pattern.

From managerial point of view, income will aid in high lighting the disparities between actual and predicted performance targets. As for governments, income is a bench mark of a company’s asset appreciation for a given period, that they may apply taxes on.

However, the importance of income measurement cannot be over emphasized. Explicte survey has revealed that ther is growing awareness of importance of income measurement and its influence on the success of a corporate organization.

Based on the above general promises of our discussion, income measurement requires expert skillful in determining not income as its effectiveness make an esteem corporate organization prosperous and successful as a result of the impact of income measurement on a business, this is to assess the income concept measurement in corporate profitability.

1.2      Statement of the Problem

Corporate organization will be safe, sound and healthy if they measure their income efficiently and periodically. These will enable investors to understand the financial health of these business organization. Today, there are many business failures as a result of poor measurement of income some corporate organization has gone bankrupt because of poor measurement of business income.

If we ignore this problems, many corporate organization will go out of business. There will be how investment, unemployment will rise, government income will reduce that is tax paid to government will drop.

In the light of all these problems and the fact that there is the awareness of the need for income measurement. This study focuses on looking at the ways and methods of measuring income. It will also highlight the need to study the accounting period issue, the continuity issue and the matching issue. Moreover, income statements, net income will be discussed. Finally, the basic elements of revenue recognition, basic elements of expenses recognition, the adjusting process and related entities and accrual-versus cash-basis accounting will be looked into.

1.3      Objective of the Study

i)            To determine the immense importance of income measurement in corporate organization. The goal of many businesses is to generate a profit for owners, employees and shareholders it provides important financial information to business, manages, investors, lender and analysts. It allows investors to make direct comparison between companies income measurement can help managers focus on specific areas for improving financial operations. Investors and creditors use it to evaluate a company’s financial performance. Management uses it to communicate with interested outside parties about its accomplishment running the company.

ii)          To critically examine and evaluate the methods used by corporate organization in measuring their income. Accounting is the method companies use to meaure profit, commonly referred to as net income. Many forms of accounting exis for measuring a company’s net income. Smaller businesses often use a basic form called bookkeeping. Larger or publicly held companies use accrual-based accounting methods that carefully track, record and report various financial transactions from business operations.

iii)        To access the general contribution of income measurement in determining the profit and loss of corporate organization. Income statement serves several important purposes.

a)          Allows shareholders/owners to see how the business has performed and whether it has made an acceptable profit (return)

b)         Help identify whether the profit earned by the business is sustainable (profit quality)

c)          Enables comparison with other similar business (e.g competitors) and the industry as a whole.

d)         Allows providers of finance to see whether the business is able to generate sufficient profits to remain viable (in conjunction with the cash flow statement)

e)          Allows the directors of a company to satisfy their legal requirements to report on the financial record of the business.

iv)        To determine the factors hindering the measurement of income in corporate organization. One of the most compelling problems that continue to confront accountants is the measurement of income of an economic entity.

a.          The issue of income recognition measurement and report is at the heart of financial reporting. What constitute accounting income and how effective it can be measured

b.          Reveneue/loss is recorded for only certain assets (such as land and buildings) as they appreciated depreciate in value (whereas the reminder of the assets are recorded according to their cost values).

c.           Capital profits go unrecorded until they are realized.

d.          Unrealized profits are not recorded until their date of realization, where as unrealized losses are recorded immediately.

e.          The allotted depreciation, depreciation expense, is an accountant’s estimate.

1.4      Research Questions

i)            When does the company i.e corporate organization present its financial statement or report?

ii)          Does corporate organization prepares its financial statement on time

iii)        How does corporate organization recognized revenue within a short period of time, such as a month or a year.

iv)        How does corporate organization recognized expenses within a short period of time

v)          What methods are useful in measuring income of corporate organization.

vi)        Does corporate organization apply matching principles concepts in the determination of their income.

vii)      Does corporate organization adjust its accounting and related entities as and when due.

viii)     Does the financial statement reflect corporate organization’s performance.

ix)        Does the financial statement shows corporate organizations profitability

x)          Does corporate organization apply the guidelines rules, and sets of rules used in determining corporate financial statement.

1.5      Research Hypothesis

The researcher hypothesis is made to test the reality and correctness of the questions contained in the measurement of corporate income. The research question can only be correct when they have been tested and proved ot be correct.

Hypothesis One

Ho: There is no significant relationship between corporate income measurement and profitability.

Hi: There is significant relationship between corporate income measurement and profitability

1.6      Significant of the Study

a)          This study will determine certain problems associate with the measurement of income in a corporate organization in Nigeria. The difficulty of assigning revenues and expenses to a short period of term such as a month or a year. Not all transactions can be assigned easily to specific time periods. Purchases of building and equipment, for example, have an effect that extends over many years.

b)         It will highlight useful information on the possible means of improvement. Publicly hold companies use accrual base accounting methods that carefully track record and report various financial transactions from business operations. The general idea is that economic events are recognized by matching revenues to expenses (the matching principles) at the time in which the transaction occurs rather than when payment is made (or received. It gives a more accurate picture of a company’s current financial condition.

c)          It will be of immense benefit to investors, government and banks

d)         Finally, it will serve as a useful guide for further researcher, who may wish to go into the subject.

1.7      Scope and Limitations of the Study

This study is to access the ways and methods corporate organizations measure their income in Nigeria and on the major components of income measurement which include elements of revenue recognitions, elements of expense recognition, the adjusting process and related entities and the accurate – versus cash basis accounting including the accounting period issue, the continuity issue, the matching issue, profit and loss account and balance sheet in carrying out this work, I encountered some set back, among the principal constraints is lack of time. Time they said has never being someone brother, and wait for no one. The time to go the library and work has always been conflicting each other. I have to go to work in the week day and weekend as well because of the nature of my work. When will I make time to go for the research in the library and in the cyber cafe? Another pressing obstacles is fond. Money has always been one of the most important factors hindering the execution of research and project. It enables the researcher to sources for materials needed for the project. It also enables the researchers to fraud wide and near for information and materials. Moreover, fear of job insecurity by staff of the accounts departments of corporate organization. They thought that I am an agent from federal inland revenue services or from the state government the staffs stated that it is against the ethics of the company to disclose such vital information to researcher citing that such things have happened in the palt, where government and tax officials disguish themselves as researchers with the intention to get information from the company. Furthermore some staff stated that some have lost their job for disclosing such information to them and advised me to go directly to the chief accountant of the company. Getting the chief accountant was not been easy, it has been from one disappointment to other.

1.8      Definition of Terms

Account: The basis storage unit of account data. There is a separate account for each assets, liability, and components of owner’s equity; including revenue and expenses.

Accountant: One who is skilled in the practice of accounting or who is in charge of public or private account. Qualified persons who is trained in bookkeeping and in preparation , auditing and analysis of account.

Accounting: An information system that measures, processes, and communicate financial information about an identifiable economic entity.

Accounting period issue: The difficulty of assigning revenues and expenses to a short period of time.

Accounting system: The sequence of steps followed in the accounting process, also called accounting cycle.

Accrual: The recognition of an expense that has been incurred or a revenue that has been earned but that has not yet been recorded.

Accrual Accounting: The attempt to record the financial effects on an enterprise of transactions and other events I the periods in which those transactions or events occur rather than only in the periods in which cash is received or paid by the enterprise; al the techniques developed by accountants to apply the inatching rule.

Assets: Probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events.

Balance Sheet: The financial statement that shows the assets, liabilities, and owners equity of a business at a point in time. Also called a statement of financial position.

Bank: An establishment authorized by a government to accept deposits, pay interest, clear cheque, make loans, act as an intermediary in financial transaction. An institution that deals with money.

Bookkeeping: The process of recording financial transactions and keeping financial records.

Business: A commercial activity engaged in as a means of livelihood or profit, or an entity which engages in such activities.

Continuity Issues: Difficulties associated with not knowing how long a business entity will survive.

Corporate: A separate legal entity having its owns rights, privileges and liabilities distinct form owners. A business unit that is legally separated from its owners.

Dividend: The distribution of a corporation’s assets (usually cash) to its stockholders.

Economist: One that helps you out with controlling your money. A person with expertise in economics who often works as an analyst or adviser.

Equity: The residual interest in the assets of a business entity that remains after deducting its liabilities.

Expenses: The cost of goods and services used up in the course of earning revenue.

Financial Statement: The primary means of communicating important accounting information to uses.

Going Concern: The assumption, unless there is evidence to the contrary, that the business entity will continue to operate indefinitely.

Government: A body of people that sets and administers public policy, and exercises executive, political, and sovereign power through customs, institutions, and laws within a state.

Income Statement: The financial statement that summarizes the amount of revenues earned and expenses incurred by a business over a period of times.

Inventory: A company’s merchandise, raw materials and finished products and unfinished products which have not yet been sold.

Management: The group of people who have over all responsibility for operating a business and for meeting its goals.

Net Assets: Owner’s equity, or assets minus liabilities.

Net Income: The net increase in owner’s equity that results form business operations revenues less expenses when revenue exceed expenses.

Net Loss: The net decrease in owner’s equity that resetting when expenses exceed revenues.

Periodicity: The recognition that net income for any period less than the life of the business, although tentative, is still a useful estimate of net income for that period.

Profit: The increase in owner’s equity that results form business operations.

Profitability: the ability to earn enough income to attract and hold investment capital.