Some Reservations on the Significance of Prospective Income Data.

Abstract The purpose of external reporting is often assumed to be the aiding of stockholders in their resource allocation. William A. Peterson recommended that realized income be reported, so that it represents prospective net income plus or minus favorable or unfavorable deviations from expectations. In this way it can represent a meaningful index of the current performance of management in its endeavor to make a profit. The rational manager would make his investment decision on the basis of present value calculations. His aim would be to maximize the present value of expected income. For efficient allocation of resources, attention should be focused on assets and on the rate of return to the undepreciated resources employed. In order for the users of external reports to evaluate management performance, the prospective income computations must accurately reflect the decision model. The value of prospective income data remains in doubt. It cannot be an improvement unless it will discourage irrational decisions and reduce the manipulation of external reports.