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Chapter 4: Question 8 (page 179)

Why should caution be exercised in the use of the net income figure derived in an income statement? What are the objectives of generally accepted accounting principles in their application to the income statement?

Short Answer

Expert verified

There are many assumptions and estimations made in the accounting, and income is reported according to these assumptions. The objectives of generally accepted accounting principles are to report the results of operations.

Step by step solution

01

Generally Accepted Accounting Principles

Generally Accepted Accounting Principles are the set of basic guidelines and rules issued by the Financial Accounting Standards Board to improve the quality of financial statements.

02

Importance of exercising caution

Exercising caution is required because various assumptions are followed in the accounting process,and outcomes such as net income represent those considerations.

If suchassumptionsare not appropriately applied, it may provide inaccurate results.

03

Objectives of GAAP

The objectives of GAAP linked with the income statement are as follows:

  • The primary objective of the GAAP is to ensure that thetransactions belonging to a specific period should be reported in the same period.
  • The application of GAAP also ensures that no artificial information should be recorded in the books.

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Most popular questions from this chapter

Vandross Company has recorded bad debt expense in the past at a rate of 1陆% of accounts receivable, based on an aging analysis. In 2017, Vandross decided to increase its estimate to 2%. If the new rate had been used in prior years, cumulative bad debt expense would have been \(380,000 instead of \)285,000. In 2017, bad debt expense will be \(120,000 instead of \)90,000. If Vandross鈥檚 tax rate is 30%, what amount should it report as the cumulative effect of changing the estimated bad debt rate?

When does tax allocation within a period become necessary? How should this allocation be handled?

The following are selected ledger accounts of Spock Corporation on December 31, 2017.

Cash \( 185,000 Salaries and wages expense (sales) \)284,000

Inventory 535,000 Salaries and wages expense (office) 346,000

Sales revenue 4,275,000 Purchase returns 15,000

Unearned sales revenue 117,000 Sales returns and allowances 79,000

Purchases 2,786,000 Freight-in 72,000

Sales discounts 34,000 Accounts receivable 142,500

Purchase discounts 27,000 Sales commissions 83,000

Selling expenses 69,000 Telephone and Internet expense (sales) 17,000

Accounting and legal services 33,000 Utilities expense (office) 32,000

Insurance expense (office) 24,000 Miscellaneous office expenses 8,000

Advertising expense 54,000 Rent revenue 240,000

Delivery expense 93,000 Casualty loss (before tax) 70,000

Depreciation expense (office equipment) 48,000 Depreciation expense (sales equipment) 36,000

Common stock (\(10 par) 900,000 Interest expense 176,000

Spock鈥檚 effective tax rate on all items is 34%. A physical inventory indicates that the ending inventory is \)686,000.

Instructions

Prepare a condensed 2017 income statement for Spock Corporation.

Identify at least two situations in which application of different accounting methods or accounting estimates results in difficulties in comparing companies.

A Wall Street Journal article noted that Apple reported higher income than its competitors by using a more aggressive policy for recognizing revenue on future upgrades to its products. Some contend that Apple鈥檚 quality of earnings is low. What does the term 鈥渜uality of earnings鈥� mean?
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