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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.
TABLE OF
CONTENTS
Title page
Certification
Approval
page
Dedication
Acknowledgement
Abstract
Table of Contents
Chapter One: INTRODUCTION
1.1 Background of the study
1.2 Statement of the problem
1.3 Objective of the study
1.4 Research Questions
1.5 Research of Hypothesis
1.6 Significance of the study
1.7 Scope and Limitation of the study
1.8 Definition of Terms
References
Chapter Two:
REVIEW OF RELATED LITERATURE
2.1 .
2.2
Chapter
Three: RESEARCH DESIGN AND METHODOLOGY
3.1 Research Design
3.2 Sources of Data
a) Primary Sources of Data
b) Secondary Sources of data
3.3 Population of Determination of Sample
Size
3.4 Methods of Investigation
Chapter
Four: PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA
4.1 Analysis of Data
4.2 Testing of Hypothesis
Chapter
Five: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings
5.2 Conclusion
5.3 Recommendations
Bibliography
Appendices
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.
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