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Chapter 4: Question 33Q (page 180)

Generally accepted accounting principles usually require the use of accrual accounting to 鈥渇airly present鈥� income. If the cash receipts and disbursements method of accounting will 鈥渃learly reflect鈥� taxable income, why does this method not usually also 鈥渇airly present鈥� income?

Short Answer

Expert verified

The cash method does not consider the credit perception linked with financial information; hence does not present income fairly.

Step by step solution

01

Meaning of Accounting Principles

Accounting principles are the milestones that facilitate the business entity to accurately record and maintain its financial information. Such principles contain a set of general rules and basic guidelines.

02

Fairly presentation of income

If a business entity adopts the cash methodfor reporting its income, it will not reflect the accurate outcomes compared to the accrual method.

The accrual method considers both cash and credit perspectives associated with business transactions. The cash method only records a transaction when cash is received or paid.

The accrual method provides income fairly because it reports the transactions irrespective of receipt and payment of cash.

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Most popular questions from this chapter

How should correction of errors be reported in the financial statements?

What kinds of questions about future cash flows do investors and creditors attempt to answer with information in the income statement?

You run into Greg Norman at a party and begin discussing financial statements. Greg says, 鈥淚 prefer the single step income statement because the multiple-step format generally overstates income.鈥� How should you respond to Greg?

Indicate the section of a multiple-step income statement in which each of the following is shown.

(a) Loss on inventory write-down.

(b) Loss from strike.

(c) Bad debt expense.

(d) Loss on disposal of a discontinued operation.

(e) Gain on sale of machinery.

(f) Interest revenue.

(g) Depreciation expense.

(h) Material write-offs of notes receivable.

Santo Corporation has eight expense accounts in its general ledger, classified as selling expenses. Should Santo report these eight expenses separately in its income statement or report one total amount for selling expenses?
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