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    Impact of supplies on income statement

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    I am conducting a review of the recording of financial transactions.

    Companies often try to manage earnings by recognizing revenue before it is actually earned according to GAAP, or by deferring expenses that have been incurred. For example, to meet the targeted earnings for a specific period, a company may capitalize a cost that should be expensed. Review that following scenario and then decide how you would handle this opportunity to manage earnings.

    You are a division manager of a large public company. Your bonus is calculated on your division's net income targets that you must meet. This year the target is $1.5 million. You are authorized to sign off on any decision made within your division. You are faced with the following:

    On November 15, your division of the company ordered $150,000 worth of supplies in anticipation of the seasonal rush. Most of these supplies will be used by year-end. These supplies were delivered on November 30. If you record this expense this year, your net income will be $1.45 million and you will not meet the target, and therefore not receive your bonus of $25,000 that you have worked hard for all year. What would you do and why?

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    Solution Preview

    The net income of $1.45 million would be if the entire supplies of 150,000 are charged to expense. Prior to supplies expense, the net income is 1.6 million (1.45+0.15). You have the ...

    Solution Summary

    The solution explains the accounting relating to supplies and the impact on income statement