Discretionary Income

Examples of Discretionary Income in the following topics:

• Debt Utilization Ratios

  • DSCR = (Annual Net Income + Amortization/Depreciation + Interest Expense + other non-cash and discretionary items (such as non-contractual management bonuses)) / (Principal Repayment + Interest payments + Lease payments)

• Disposable Income

  • Income left after paying taxes is referred to as disposable income.
  • Discretionary income is disposable income minus all payments that are necessary to meet current bills.
  • Discretionary income = Gross income - taxes - all compelled payments (bills)
  • Disposable income is often incorrectly used to denote discretionary income.

• Income Security Policy and Policy Making

  • Income security policy is designed to provide a population with income at times when they are unable to care for themselves.
  • Income Security Policy is usually applied through various programs designed to provide a population with income at times when they are unable to care for themselves.
  • Income maintenance is based in a combination of five main types of program
  • Discretionary benefits.

• Arguments For and Against Discretionary Monetary Policy

  • Discretionary policies refer to subjective actions taken in response to changes in the economy.
  • For much of the 20th century, governments adopted discretionary policies to correct the business cycle.
  • A discretionary policy is supported because it allows policymakers to respond quickly to events.
  • This can create compounding issues related to the discretionary policy enacted.
  • A compromise between strict discretionary and strict rule-based policy is to grant discretionary power to an independent body.

• Automatic Stabilizers Versus Discretionary Policy

  • Automatic stabilizers and discretionary policy differ in terms of timing of implementation and what each approach sets out to achieve.
  • In practice, most policy changes are discretionary in nature.
  • With discretionary policy there is a significant time lag.
  • Discretionary policies can target other, specific areas of the economy.
  • Discretionary policies can address failings of the economy that are not strictly tied to aggregate demand.

• Difficulty in Getting the Timing Right

  • Discretionary fiscal policy relies on getting the timing right, but this can be difficult to determine at the time decisions must be made.
  • A nation can respond to economic fluctuations through automatic stabilizers or through discretionary policy.
  • With discretionary fiscal policy, timing plays a very significant role.
  • Discretionary policy often requires that a set of laws must be passed through a legislature.
  • Once the discretionary program is in place, the next step is to measure its effectiveness.

• The Goals of Economic Policy

  • For much of the 20th century, governments adopted discretionary policies such as demand management that were designed to correct the business cycle.
  • A discretionary policy is supported because it allows policymakers to respond quickly to events.
  • However, discretionary policy can be subject to dynamic inconsistency: a government may say it intends to raise interest rates indefinitely to bring inflation under control, but then relax its stance later.
  • A compromise between strict discretionary and strict rule-based policy is to grant discretionary power to an independent body.
  • Another type of non-discretionary policy is a set of policies which are imposed by an international body.

• Closing the Cycle

  • Closing the revenue accounts—transferring the balances in the revenue accounts to a clearing account called Income Summary.
  • Closing the Income Summary account—transferring the balance of the Income Summary account to the Retained Earnings account (also known as the capital account).
  • After transferring all revenue and expense account balances to Income Summary, the balance in the Income Summary account represents the net income or net loss for the period.
  • Closing or transferring the balance in the Income Summary account to the Retained Earnings account results in a zero balance in the Income Summary.
  • It is not closed to the Income Summary because dividends have no effect on income or loss for the period.

• Fringe Benefits

  • Fringe benefits are various indirect benefits, often of a more discretionary nature than standard benefits.
  • The term perks (also perqs) is often used colloquially to refer to those benefits of a more discretionary nature.

• Income Statement Formats

  • Income statements are commonly prepared in two formats: multiple-step and single-step.
  • Income statements are commonly prepared in two formats: multiple-step and single-step.