Question

1. Berful Industries, a US corporation using US GAAP accounting standards, wants to increase its reported net income this year. Will the following actions result in an increase in net income for the firm?

1. Berful is going to select double-declining balance depreciation for the new assets it acquires this year instead of the straight-line method.                                                              Yes _____ No _____

2. Berful plans to sell treasury stock at a price substantially above its acquisition cost this year.                               Yes _____ No _____

3. Berful plans to issue new common shares this year, with a par value of $1 per share, believing that it can sell the new shares for $40 per share.                                       Yes _____ No _____

4. Berful plans to receive about $5,000 in dividends from its marketable security portfolio of publicly-traded common stock this year.                                                              Yes _____ No _____

5. Berful plans to change from LIFO to FIFO in measuring the cost of its ending inventory and cost of goods sold, in a period of rising prices.                                                        Yes _____ No _____

6. Berful has used the direct write-off method to account for bad debts, but must change to the allowance method, in a year in which it has no write-offs, but expects to discover next year that some of the current year sales are uncollectible. Will this change reduce net income?                                      Yes _____ No _____

7. Berful wishes to accelerate the timing of the recognition of revenue by collecting cash in advance of performing services or delivering goods. Does net income increase?                  Yes _____ No _____

8. Berful is planning to sell land it has owned for many years, expecting to recognize a gain of $50,000.      Yes _____ No _____

1. Berful is considering purchasing a machine, but is concerned that the sales taxes and delivery costs will drive down its reported profit in the year of purchase. Will these costs decrease net income in the year of purchase?                                   Yes _____ No _____

10. Berful is planning to hire a new officer for the corporation on the last day of the year, with his services to begin next year. Will the profit this year be decreased for his salary? Yes _____ No _____

11. Berful plans to undertake a large research and development project this year. Will the cost of this R&D activity reduce net income this year?                                   Yes _____ No _____

12. Berful is planning to acquire another company this year, and hopes to avoid the recognition of goodwill. Will the recognition of goodwill reduce the net income of Berful in the year of acquisition?                                                                           Yes _____ No _____

13. Berful is concerned that the dividends it declares will be treated as expenses in the year declared—true?                  Yes _____ No _____

Answer 1

As per guideline only 4 subparts can be answered, though I will try to provide all the answers:

a. The change from SLM to Double Declining Method of Depreciation will result into more depreciation and hence will lead to decrease in net income.

b.Gain on Sale of Treasury Stock will lead to increase in Net Income, however, it will be income from investing activities and not from operations.

c. Issue of New Common Shares does not affect the income statement, as it is part of Balance Sheet Item. Hence issue of new common shares will not have any impact on net income.

d. Dividend receipt will lead in increase in net income.

e. Under LIFO Method Stock is treated as last in first out, whereas in FIFO method stock is treated as First in First Out. In a scenario of rising price, the FIFO will result into higher Closing Value and hence will lead in increase in net income.

f. Whether it write off or allowance, will not having any positive impact on net income.

g. The Accounting has to be done on Accrual Basis, so method of collection will not have any impact on net income.

h. Gain of Sale of Land will lead to increase in Net Income, however, it will be income from investing activities and not from operations.

i. Purchase of Machinery and its associated costs such as taxes, delivery cost will be capitalised, and there will no impact on net income, as it is part of Balance Sheet.

j. The salary is to be recognised from the date of service, here it is falling in the next year, hence it will not impact net income this year.

k. R&D Activity can be capitalised, hence will not have any impact on net income.

l. No. recognition of goodwill will not have any impact on net income and it will be part of Balance Sheet.

m. Dividend is a post tax item and is not an expense.