An Examination of the Reliability of Various Income Measures for Assessing the Maintenance of Operating Capability
Sander, James Frederick
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https://hdl.handle.net/2142/71406
Description
Title
An Examination of the Reliability of Various Income Measures for Assessing the Maintenance of Operating Capability
Author(s)
Sander, James Frederick
Issue Date
1987
Doctoral Committee Chair(s)
McKeown, James C.
Department of Study
Accountancy
Discipline
Accountancy
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Business Administration, Accounting
Abstract
Disclosure of Current-Cost Income according to pronouncements by authoritative accounting bodies in Australia, the United Kingdom, and the United States is intended to represent Theoretic Distributable Income (TDI) and to be useful in assessing whether the conceptual objective of maintenance of operating capability has been achieved. Although this conceptual objective is common to each Current-Cost Income model and underlies the calculation procedures as set forth by the authoritative bodies, the calculation procedures are substantially different.
This research uses computer simulation to investigate the degree to which each of eight models, six authoritatively-based and two proposed by Sharp, reliably represent TDI. For this purpose, two concepts of TDI are identified: annual and lifetime, which are based on beginning-of-the-year and initial operating capability, respectively. Other independent variables are: level of Long-Term Debt (LTD), level of Monetary Working Capital (MWC), and Pattern of Fixed Asset Replacement (PFAR). The simulation methodology includes a deterministic approach, a stochastic approach with parameters based on empirically-based time-series models, and scaling ratios to constrain the financial characteristics of the simulated firm to environmentally realistic values.
It is found that Sharp's BPDO model exhibits no unreliability in representing either annual or lifetime Theoretic Distributable Income. However, Sharp's PDO model exhibits no unreliability in representing only annual TDI. Reliability of the other models occur in more than one component, are frequently offsetting, and vary depending on environmental conditions and the financial characteristics of the firm. Level of LTD, level of MWC, and PFAR are significant in their effects on model reliability. It is recommended that calculation procedures for a long-term monetary item adjustment be based upon the full price change (not average) for the period, changes in specific (not general) prices, beginning-of-the-period (not average) balance of nonmonetary assets, and that this adjustment be applied for either debit or credit balances.
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