Income Concepts and Income statement - Assignment Example

It is the most traditional method of determining the quality of the income. Through this way, the business can realize whether it made a profit or a loss. Analysts have however criticized this method arguing that it only focuses on short-term profits and losses, but not long term. They, however, discourage mostly businesses from using it. It is, however, the most common output generated by accounting software when analyzing the earnings of a company (Porter & Norton, 2012). Second, small businesses that earn their revenue through sales, sales growth is the most ideal metric to measure the quality of the earnings.

It shows roughly the estimate of how the business is trending throughout time. The sales growth method measures the percentage of the earnings as a percentage of growth throughout a year. It is in terms of either positive sales growth or negative sales growth. Positive sales growth indicates that the business is growing while, on the contrary, negative sales growth shows that the sales have declined over the past year (Porter & Norton, 2012). Financial ratios can be used to determine the quality of the earnings of the firm.

Using the company’s financial statements, there can be an easy computation of financial ratios. It is the most efficient and simplest way to determine the performance of a firm. If you focus on the right type of ratio, your analysis of the concern, you have can come out right. For instance, if you are most concerned with the ability of your firm to convert assets to cash for satisfying a short term goal, you may most probably calculate some liquidity ratios and see how many dollars of current assets you have for each dollar of current liabilities.

It is usually useful to the business owner who has less time but needs quick information on the performance of the firm (Porter & Norton, 2012). Additionally, a firm can also use expense reduction as metric for determining the quality of income. The expense reduction