The accounting profession has employed the matching concept to determine what to report in the income statement and to determine how to measure items reported in the income statement. This concept implies that expenses should be measured directly, and thus balance sheet measures are residuals. The matching concept is therefore an income statement approach to the measurement and reporting of revenues and expenses.

SFAC No. 5 defined earnings as the change in net assets exclusive of investments by owners and distributions to owners, a capital maintenance concept of earnings measurement. Under this concept, assets and liabilities would be measured directly, and changes to them would flow through the income statement. Thus the SFAC No. 5 definition of earnings represents a balance sheet approach to the measurement and report of revenues and expenses.

Required:

a. Describe and discuss the matching concept and its importance to income reporting.

b. Give 4 specific examples of how the matching concept is used in practice.

c. Describe and discuss the balance sheet approach and its importance to income reporting.

d. Give 4 specific examples of how balance sheet measurements affect the measurement and reporting of earnings.