Department of Accounting and Finance, University of Vaasa,
Finland

Notes and References:

1. Martti Saario, "Yrityksen rahoitus ja kirjanpidon meno-tulo- teoria." Teollisuustaloudellisen Yhdistyksen vuosikirja (1958); Martti Saario, Kirjanpidon meno-tulo-teoria (Helsinki: Kustannusosakeyhtio Otava, 1959); Some aspects were presented already in Martti Saario, Realisointiperiaate ja kayttoomaisuuden poistot tuloslaskennassa. (English summary: Realization Principle and Depreciation of fixed Assets.) Doctoral dissertation. Publications of the Helsinki Research Institute for Business Economics 6. (The Helsinki School of Economics, 1945).

2. This is the basic (different) assumption from which the Finnish expenditure-revenue accounting model follows. The other important difference is not considering transactions in the terms of the balance sheet, and thus not (directly) utilizing the "assets = liabilities + owners' equity" equation (although it can be shown to hold in expenditure-revenue accounting).

3. The expenditures relate to the financial flows resulting from acquiring inputs needed to produce outputs generating the revenues. In other words they relate to the financial flows not directed to the capital market (see Figure 1). As will be seen, the expenditures are measured in accordance with the historical cost convention, and they are recorded on the accrual basis.

4. The revenues relate to the financial flows generated by the outputs. In other words they relate to the financial flows not originating from the capital market (again see Figure 1). As will be seen, the standard conventions apply also in measuring the revenues.

5. The term total income is used this time rather than the total profit in order to indicate the fact that also a total loss is conceivable in case the whole business venture backfires. Thus the word "profit" has the connotation of positive income in this paper.

6. Note that this will definitely not mean a suggestion for a cash-flow accounting model. Accrual basis is used. 7. While this simplification is in effect for the illustrative reasons the subcategory "accounts receivable and payable" is not needed in financing accounts.

8. This term is deliberately used instead of "financial statements" in order to stress their underlying nature.

9. The reader may find it helpful to consult Figure 4 in reading the text of this chapter.

10. In accordance with the original sources (c.f. footnote 1) I use here the word profit instead of income.

11. This assertion is supported by any study of bankruptcy.

12. This argument was brought to my attention by Professor Veikko Jaaskelainen of the Helsinki School of Economics.

13. In our discussion, "closing of accounts" will denote the whole process of preparing the annual financial statements.

14. In the U.S. accounting terminology it is often said that the expenditure is capitalized. (In the Finnish terminology we say it to be "activated".)

15. Unrealized revenues, which have been collected in advance by the firm, are naturally treated in an analogous manner. They become liabilities instead of assets in the annual closing of accounts.

16. In addition to the consistency requirement,the following reasoning has been used to support this argument. Consider, for example, a three-year total period with a total profit of $100. If the annual incomes were defined as $200, -$100, and $0 respectively, and all the reported incomes were distributed (as taxes and dividends), then the firm would in fact be distributing also its basic capital in the first year.

17. For a discussion on the possibility of existence of a true association see the discussion on inseparability, multiplicity, and instability of causal networks by Yuji Ijiri, The Foundations of Accounting Measurement: A Mathematical, Economic and Behavioral Inquiry (Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1967), 58-64.

18. Except, of course, in the rare cases where the business venture is so short-lived that the total period can actually be observed. In that case all the expenditures naturally are relevant expenses. Historically, it is interesting to note that the early (1600's) bookkeeping related to one time project-ventures.

19. In Finnish this question has been thoroughly discussed in Jaakko Honko. Yrityksen vuositulos (English summary: The Annual Income of an Enterprise and Its Determination: A Study from the Standpoint of accounting and Economics). (Publications of the Helsinki Research Institute for Business Economics 25. Helsinki, 1959).

20. Martti Saario "Kustannusten etuoikeusjarjestyksesta." Huugo Raninen 50 vuotta. (Helsinki, 1949).

21. Jaakko Honko. Op.cit.

22. Although not always approved of by accountants, depreciation can also regarded as the part of the annual revenues which should be assigned to acquiring assets represented by the long-term expenditures.

23. The years'-digits method is not used in financial accounting in Finland.

24. Accelerated depreciation methods defer income-tax outlays. This increases the present value of aftertax income even though the sum of the taxes remains unchanged.

25. The advocates of this method point out that it is the only depreciation method which results in the correct rate of return on the unrecovered part of the expenditure, throughout the life-span of the expenditure. See Timo Salmi and Martti Luoma, "Deriving the Internal Rate of Return from the Accountant's Rate of Profit: Analysis and Empirical Estimation." The Finnish Journal of Business Economics (No. 1, 1981), 20-45.

26. Martti Saario, op.cit. (C.f. footnote 1).

27. Martti Saario. "Poistojen paaoma-arvo ja oikea-aikaisuus," Mercurialia MCMLXI (Helsinki 1961).

28. It should be noted that it is impossible to ascertain an association between a long-term expenditure and revenues, except under highly simplifying assumptions, as pointed out in connection with realization depreciation by Reijo Ruuhela, Yrityksen kasvu ja kannattavuus. (English summary: A Capital Investment Model of the Growth and Profitability of the Firm.) Doctoral Dissertation. (The Helsinki School of Economics, 1972), p. 32; Also see Reijo Ruuhela & Timo Salmi & Martti Luoma & Arto Laakkonen, "Direct Estimation of the Internal Rate of Return from Published Financial Statements." The Finnish Journal of Business Economics (No. 4, 1982), 329-345.

29. Unless the revenues resulting from the expenditure increase annually at a rate greater than the internal rate of return.

30. For simplicity the revenues have not been divided into realized revenues and deferred revenues in Figure 4, since deferred revenues seldom are a major item. The division is naturally observed in expenditure-revenue accounting in accordance with the realization convention, nevertheless.

31. For simplicity, Figure 4 does not delineate the difference between net income and retained earnings. Retained earnings are net of dividends distributed. Also other differences are conceivable like the effects of currency translation in multi-currency accounting situations.

32. For instance, the lower of cost or market rule is applicable. One special feature of the Finnish accounting and tax legislation is that up to quarter of the direct cost of the inventories can be written off as expense.

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