5. Respond to the following: a. What is meant by the “articulated” approach to f

Question

5. Respond to the following: a. What is meant by the “articulated” approach to financial statements? b. How does the revenue-expense approach differ from the asset-liability approach for defining accounting elements? c. What, if any, would be the advantage of using a non-articulated approach to financial statements?

6. What are the three distinct types of assets that appear in the balance sheets, and what degree of certainty and measurement reliability does each represent?

Please describe in detail.

Explanation / Answer

Ans : a : Articulation means that the income statement and balance sheet are mathematically defined in such a way that net incomes equal to the change in owners’ equity for a period, assuming no capital transactions or prior period adjustments. The information flows back and forth between the Income Statement and Balance Sheet. This is called articulation. There are some very important articulations to watch when preparing financial statements. The financial statements should be prepared in the correct order, so the information articulates (flows) correctly. The Income Statement should be prepared first. Net Income or Net Loss flows to the Statement of Retained Earnings (or Statement of Stockholders’ Equity). The ending balance of Retained Earnings flows to the Stockholder’s Equity section of the BalanceSheet.

Ans : b : Revenue-expense proponents are primarily concerned with stabilizing the fluctuating effect of transactions on the income statement and are prepared to introduce deferred charges and deferred credits in order to smooth income measurement. Asset-liability advocates are mainly concerned with reporting changes in the value of net assets, and they are prepared to tolerate a fluctuating income statement that may include unrealized holding gains and losses. If the financial statements were severed, both the income-expense and asset-liability groups might be satisfied with a revenue-based incomestatement and an asset-liability-based balance sheet.

Ans : c :  In the non-articulated approach, there is no need for this mathematical correspondence between the two. The balance sheet need not correspond to the income statement or vice versa. Because non-articulation severs the mathematical relationships between the balance sheet and income statement, some of the traditional accounting customs that govern their completion in the articulated method don't have direct application. Harry I. Wolk, James L. Dodd, and John J. Rozycki, authors of the book "Accounting Theory: Conceptual issues in a Political and Economic Environment," argue that it might be possible to do away with such conventions in favor of the non-articulated approach. In this approach, the income statement would only be based on revenue and expenses, while the balance sheet would only be based on assets and liabilities. The possibility of putting the non-articulated view to use in the business world can be a reality if business owners are sure of the reliability of their income statement. In accrual accounting, balance sheets have to balance out, which is why articulation is such a prevalent conceptual framework. The non-articulated approach highlights this as a flaw by recognizing that the conventions of accrual accounting do not necessarily represent reliable income measurements. Instead they represent artificial impositions on the balance sheet upon which the income statement is based. A non-articulated view keeps the balance sheet and income statements separate so that each stands and is utilized on its own.

Ans : d : : The three types of assets that appear in balance sheets are those held for sale, those that have economic value through use in production, and deferred charges. Assets held for sale and measured at net realizable value (such as receivables) represent a high degree of certainty as to realization as well as measurement reliability. Assets held for production represent more uncertainty as to the realization of future economic benefits due to the inherent uncertainty of manufacturing. Furthermore, historical cost gives little indication of the productive value of such assets. Finally, certain types of deferred charges do not have any direct effect on future cash flows.

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