Differences between Transitory and Permanent Earnings |
Kory D. Lee |
Businesses rise and fall with the tides of profit from either goods sold or services rendered. One question that arises from the review of the financial reporting is wither or not the reported profits are actually real, permanent earnings or transitory in nature. Although many accountants try to be ethical and maintain a level of integrity, some accountants tend to “cook the books” so to speak to artificially enhance the reporting of earnings to enhance the company’s bottom line.
When an analysis of earnings is conducted for a number of small businesses there are indications of rising earning inequality as shown by breaking down the income into permanent and transitory parts and by examining how much each of these parts contribute to the cross-sectional variance of business. In reality, income is subject to many different forms of shocks. Some of these might be truly permanent, and some completely transitory. Most income analysis shows a correlation between the two aspects of the income nature. Most auditors tend to take a stand on the components and somewhat disagree with the classification. There is a semblance of arbitrariness because of conflict arises between defining when income earnings are reported and in what form.
Transitory income is actually a type of short-lived income. It can be calculated as the difference between the standardly measured income and what can be classified as permanent income. So with the increase in this short-lived income, a false sense of higher earnings is shown. Milton Freeman, the noted economist, described this income as “… an anticipated income. It may be either positive or negative”. From a positive sense, the income from transitory sources can be seen in some of the deferred expense accounts and will affect future income reporting. As a negative, there is an increase and change in the interest expense...