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Chapter 4: Question 33Q (page 180)

Generally accepted accounting principles usually require the use of accrual accounting to “fairly present” income. If the cash receipts and disbursements method of accounting will “clearly reflect” taxable income, why does this method not usually also “fairly present” 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

Question: What is the major distinction (a) between revenues and gains and (b) between expenses and losses?

Brisky Corporation had net sales of \(2,400,000 and interest revenue of \)31,000 during 2017. Expenses for 2017 were cost of goods sold \(1,450,000, administrative expenses \)212,000, selling expenses \(280,000, and interest expense \)45,000. Brisky’s tax rate is 30%. The corporation had 100,000 shares of common stock authorized and 70,000 shares issued and outstanding during 2017. Prepare a single-step income statement for the year ended December 31, 2017.

Vandross Company has recorded bad debt expense in the past at a rate of 1½% 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’s tax rate is 30%, what amount should it report as the cumulative effect of changing the estimated bad debt rate?

Qualls Corporation reported 2017 earnings per share of \(7.21. In 2018, Qualls reported earnings per share as follows.

On income from continuing operations \)6.40

On discontinued operations \(1.88

On net income \)8.28

Is the increase in earnings per share from \(7.21 to \)8.28 a favorable trend?

The non-controlling interest section of the income statement is:

(a) required under GAAP but not under IFRS.

(b) required under IFRS but not under GAAP.

(c) required under IFRS and GAAP.

(d) not reported under GAAP or IFRS.
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