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    Computation of net income, responsibility accounting

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    1. One Very Short Paragraph of discussion needed:
    Computation of Net Income
    What useful information do we derive from the computation of Net Income?
    Do not simply answer with the formula for calculating Net Income - Revenue less Expenses. Rather, comment on the value added economic information we receive through the computation of Net Income. For example, is it a measure of increase in shareholders' wealth or is it a measure of the increase in cash available to the company, etc.?
    What other portions of a company's financial statements are important - and why?

    2. One Very Short Paragraph of discussion needed:
    Responsibility accounting
    In your job (or in your personal life), what types of costs can you control, and what types of costs are beyond your control? What are the repercussions if you overspend those costs that you can control?

    3. One Very Short Paragraph of discussion needed:
    Inclusion of fixed costs
    Why might the inclusion of fixed costs in the calculation the cost of a product provide us with a number that is not very useful? For what purposes is such a calculation possibly useful?

    4. One Very Short Paragraph of discussion needed:
    Sunk costs
    Are sunk costs ever relevant for decision-making purposes? if so, then in what way? If not, then why do people often act as if they are relevant?

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    Solution Preview

    Hi there,

    Here are your answers:

    1. Discussion on the value of Net Income:

    You pose an interesting question: is Net Income a measure of increase in shareholders' wealth or is it a measure of the increase in cash available to the company, etc.? I think it can be considered both. Net Income tells the investor how much value the company has retained out of its business operations. Net Income gets filtered into retained earnings, so it does measure how much the company is worth. At the same time, the amount of money that is left over after business operations (i.e. net income), can be considered as additional cash for the company to spend on other ventures. Another portion of a company's financial ...

    Solution Summary

    Computation of Net Income
    What useful information do we derive from the computation of Net Income?
    Do not simply answer with the formula for calculating Net Income - Revenue less Expenses. Rather, comment on the value added economic information we receive through the computation of Net Income. For example,

    $2.19