Respond to the following: a. How is net income different from earnings in SFAC No. 5? b. What is comprehensive income?
What will be an ideal response?
ANSWER:
a. One of the principal concerns of SFAC No. 5 was the format and presentation of changes in owners’ equity that do not arise from transactions with owners. “Earnings” would replace net income and would differ from the latter by excluding the cumulative effect on prior years of a change in accounting principle. Earnings would thus be a better indicator of current operating performance than net income.
b. Comprehensive income includes all changes in owner’s equity during the period except for transactions with owners. A cumulative effect of a change in accounting principle would be included in comprehensive income as would such items as the income effect of recognized gains and losses of marketable securities that are not classified as current assets, foreign currency translation adjustments, and prior period adjustments.
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