Assessment Description:
Explain what is meant by the term “sustainable income.” Why is it important to distinguish between sustainable income and actual net income? Is one more important than the other? Please explain.
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SOLUTION to ACC 240: Fundamentals of Accounting- Topic 4 DQ 2.
Hello class,
To quantify sustainable income, Nosratabadi et al (2019) defined it as an income stream that is reasonably stable, reliable, and sustainable over the long run without undue cost and without spending beyond one's income to acquire it. This has a vital role to play in the overall financial analysis since it helps in the actual determination of the earning capacity of a firm and leaves out the special incidences that can make the income statement appear to be healthier than it actually is.
The distinction between sustainable income and actual net income is important for several reasons. Actual net income, as reported in financial statements, includes all revenues and expenses for a given period, including non-recurring items. In contrast, sustainable income focuses on the core, ongoing operations of a business. According to Nizam et al. (2024), this difference helps investors, analysts, and managers better understand a company's long-term financial health and performance prospects. For example, a company might report high net income in a particular year due to the sale of a major asset or a one-time tax benefit. While these events boost the bottom line, they do not represent the ability of the company to generate consistent earnings from its core business activities. Sustainable income would exclude such non-recurring items, thus providing a clearer picture of the company's ongoing financial performance.
In my opinion, neither sustainable income nor actual net income can be considered universally more important than the other, as they serve different purposes. Actual net income is crucial for statutory reporting, tax calculations, and understanding the overall financial position of a company at a given point in time. This is because it provides a comprehensive view of all financial activities within a specific period. On the other hand, sustainable income is particularly valuable for long-term analysis and decision-making. It helps in forecasting future performance, valuing companies, and assessing the stability of dividend payments. Nonetheless, investors and analysts often use sustainable income metrics, such as normalized earnings to make more informed investment decisions (Popescu et al., 2021).
References
Nizam, M. K., Pathoni, D., Chilmi, M. F., & Nurhaliza, N. (2024). Exploring the Impact of Operating Cash Flow, Financial Leverage, and Sustainability Accounting on Earnings Persistence: A Study of Manufacturing Firms in the Jakarta Islamic Index (JII). Glopendi Journal of Innovative Management and Accounting, 1(1), 17-29.
Nosratabadi, S., Mosavi, A., Shamshirband, S., Zavadskas, E. K., Rakotonirainy, A., & Chau, K. W. (2019). Sustainable business models: A review. Sustainability, 11(6), 1663. https://doi.org/10.3390/su11061663
Popescu, I. S., Hitaj, C., & Benetto, E. (2021). Measuring the sustainability of investment funds: A critical review of methods and frameworks in sustainable finance. Journal of Cleaner Production, 314, 128016. https://doi.org/10.1016/j.jclepro.2021.128016