Wholesale Inc. hired dual accountants to hope for monetary statements for the company. Wholesale Inc. has accounts receivables with poignant write-offs, inventory, as well as equipment. Both accountants used GAAP, as well as conjunction accountant done an blunder in formulating these statements, though their net income as well as defended gain do not match. Explain how this is possible.
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Accountants are trained to look at Money through rose colored glasses with a jaundiced eye. There are different ways of interpreting tax law based on the way the accounting is done. Depending on how the accountants interprete these rules, they can end up with entirely different answers.
companies may lower their net income in order to reduce income taxes paid by 1) classifying certain equipment as section 129 assets in order to expense the capital in the period incurred instead of depreciating over time, 2) increasing their bad debt provisions in order to increase bad debt expense, 3) devaluing their inventory to increase supplies expense to reduce net income.
That’s because there’s a range of acceptable practices under GAAP. For AR, you can choose to create your allowance as a percentage of net credit sales or as a percentage of AR balance, or based on the no. of days outstanding. For inventory, different cost formulas could have been used, e.g., FIFO, LIFO, weighted average, etc. For equipment, different depreciation policies could have been adopted, e.g. straight-line, double-declining, sum of digits, units of activity, etc. All these are accepted under GAAP, but obviously will produce different results.