Three different measures of incomes
Suppose that Myers and Myers in P3-8 paid no dividends during 2012 and that the December 31, 2012, balance sheet looks like the one below. (This problem requires knowledge of present value calculations. Refer to Appendix A.)
|
Assets |
Liabilities and Shareholders” Equity |
||
|
Cash |
$ 30,000 |
Current liabilities |
$ 6,000 |
|
Short-term investments |
20.,000 |
Long-term liabilities |
20,000 |
|
Land |
20.,000 |
Common stock |
80,000 |
|
Buildings and machinery |
76,000 |
Retained earnings |
40,000 |
|
Total liabilities and |
|||
|
Total assets |
$146,000 |
shareholders” equity |
$146,000 |
Assume that the investor in P3-8 was correct (i.e., the company produced $20,000 cash during 2012) and that the investor”s expectations at the end of 2012 are unchanged. Assume further that an objective appraisal of the company”s assets revealed the following FMVs as of December 31, 2012:
|
Cash |
$ 10,000 |
|
Short-term investments |
20,000 |
|
Land |
66,000 |
|
Buildings and machinery |
32,000 |
|
Total F1V1Vs |
$143,000 |
REQUIRED:
a. What dollar amount did Myers and Myers report in 2012 for net income under generally accepted accounting principles?
b. Calculate net income during 2012, using fair market values as the asset and liability valuation bases (i.e., FMV2012 – FMV2011).
c. Calculate economic income for 2012 (i.e., cash received during 2012 plus the change in present value). The discount rate is still 10 percent.
d. Discuss the differences among these three measures of income. Discuss some of the strengths and weaknesses of each measure.