What is the concept of sustainable income? Please describe it in your own words. Can you give an example of what this number may look like by using the income statement of a real-life company?
Solution
Sustainable Income is income from ordinary operational activities which is of a recurring nature. That is the stake holders expectation about continuity of income reported in the future years. The Financial Income statement may contain both transactions pertains to regular operating activities as well as non-recurring and non operational items. If non operational items are of a recurring nature, it may also be taken in to consideration for determining sustainable income. Infact one of the limitation for an Income Statement prepared as per GAAP, is the volatility due to high profit in one period compared to another period. Investors or other persons interested in the financials of a company is more interested in sustainability of the earnings of the company, i.e whether the company will be able to generate the same level income under similar operating conditions.
Examples of items which is normally excluded from the calculation of sustainable income are:
Gain on sale of a major fixed assets
Compensation or grants received from authorities for initial set up or loss incurred under specified conditions
Loss of assets due to theft,fire etc.
Expenses which will bring benefits for multiple years like major advertisment/ marketing expenses
Research and development expenses which brings long time benefits
.
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What is the concept of sustainable income- Please describe it in your.docx
1. What is the concept of sustainable income? Please describe it in your own words. Can you give
an example of what this number may look like by using the income statement of a real-life
company?
Solution
Sustainable Income is income from ordinary operational activities which is of a recurring nature.
That is the stake holders expectation about continuity of income reported in the future years. The
Financial Income statement may contain both transactions pertains to regular operating activities
as well as non-recurring and non operational items. If non operational items are of a recurring
nature, it may also be taken in to consideration for determining sustainable income. Infact one of
the limitation for an Income Statement prepared as per GAAP, is the volatility due to high profit
in one period compared to another period. Investors or other persons interested in the financials
of a company is more interested in sustainability of the earnings of the company, i.e whether the
company will be able to generate the same level income under similar operating conditions.
Examples of items which is normally excluded from the calculation of sustainable income are:
Gain on sale of a major fixed assets
Compensation or grants received from authorities for initial set up or loss incurred under
specified conditions
Loss of assets due to theft,fire etc.
Expenses which will bring benefits for multiple years like major advertisment/ marketing
expenses
Research and development expenses which brings long time benefits
