Question One: Describe how accounting policies are defined in the literature

According to the Accounting Standards Codification, there are specifically selected procedure, rules and principles which a business enterprise chooses in the preparation and presentation of its financial statements and disclosures at the end of its specified accounting period ( Accounting Standards Codification Professional Review , n.d.).

Upon deciding which accounting policies to apply in a given enterprise, the following factors must be kept in consideration:

1. Reliability: The information provided in the statement should such that it can be used by third parties and other stake holders in decision making.
2. True and fair view
3. Substance over form: the information presented should be based on the economic importance of an item and not its legal substance.
4. Relevance: the information provided should be able to solve problems pertaining to the current economic trends.
5. Prudence: The valuation of the assets and incomes of an entity should not be overstated or understated.

The accounting policies specifically deal with:

1. Depreciation method to apply i.e. neither of the following: reducing balance method, straight-line method etc
2. Stock pricing
3. How consolidation of accounts will be dealt with
4. The going concern (good will) of an entity.

The accounting policies used by an entity must be disclosed in the annual statements of the entity.

NB: Any accounting policies applied by an entity MUST comply with the accounting standards of their respective countries or regions.

Question Two: Discuss how the authoritative literature addresses comprehensive income

Comprehensive income is the sum of gains or losses from items that don’t appear on the income statement (since they are not realized) and net income.

Authoritative literature defines comprehensive income not in technical terms but in absolute terms and in plain English.

Question Three: Define three classifications within net income and give an example of each

Net income is a broad term that is defined as the balance of an entity’s total income/revenue less the entity’s total expenses (Downes & Goodman, 2006; Accounting Standards Codification Professional Review, n.d.). It can be classified into the following:

• Personal/individual net income: this is the residual income that an individual receives after the tax due from him is levied from the gross income.