X Inc. and Y Inc. are virtually identical companies with identical cost structures and very similar business practices operating in the same lines of business. X Inc. is a public company based in Canada and follows IFRS while Y Inc. is a private enterprise based in Canada and follows ASPE. The following were the condensed income statements for both companies for the last year before both adopted IFRS.

$$\begin{array} { | l | r | r | }
\hline & \text { X Inc. } & \text { Y Inc. } \
\hline \text { Sales: } & \$ 1,000,000 & \$ 2,000,000 \
\hline \text { Less: } & & \
\hline \text { Cost of Goods Sold } & \$ 500,000 & \$ 1,600,000 \
\hline \text { Gross Margin } & \$ 500,000 & \$ 400,000 \
\hline \text { Administrative Expenses } & \$ 200,000 & \$ 300,000 \
\hline & & \
\hline \text { Net Income: } & \$ 300,000 & \$ 100,000 \
\hline
\end{array}$$
Required:
Given the information provided, what are some possible causes for the differing results of these companies?

Question

X Inc. and Y Inc. are virtually identical companies with identical cost structures and very similar business practices operating in the same lines of business. X Inc. is a public company based in Canada and follows IFRS while Y Inc. is a private enterprise based in Canada and follows ASPE. The following were the condensed income statements for both companies for the last year before both adopted IFRS.

$$\begin{array} { | l | r | r | } 
\hline & \text { X Inc. } & \text { Y Inc. } \
\hline \text { Sales: } & \$ 1,000,000 & \$ 2,000,000 \
\hline \text { Less: } & & \
\hline \text { Cost of Goods Sold } & \$ 500,000 & \$ 1,600,000 \
\hline \text { Gross Margin } & \$ 500,000 & \$ 400,000 \
\hline \text { Administrative Expenses } & \$ 200,000 & \$ 300,000 \
\hline & & \
\hline \text { Net Income: } & \$ 300,000 & \$ 100,000 \
\hline
\end{array}$$ 
Required:
Given the information provided, what are some possible causes for the differing results of these companies?

Quizplus · Accepted Answer

The Answer is There could be many possible explanations for these differing results. Y Inc.'s net income is $100,000, compared to X Inc.'s $300,000. Conversely, Y Inc.'s sales are twice those of X Inc. What is particularly noteworthy is Y Inc.'s 20% gross margin compared to X Inc.'s 50% gross margin. This could be due to the accelerated depreciation on Y Inc.'s property, plant and equipment or provisions made for future maintenance costs.
Smoothing practices may have been applied to reduce Y Inc.'s income, and of course, its tax liability. Y Inc.'s income may have been further reduced by higher estimates (for example: bad debt expense, warranty costs and so forth) which are not necessarily be indicative of economic conditions.
Note: Once again, the above analysis is not necessarily exhaustive. Students may be able to identify other valid differences.

X Inc and Y Inc Required: Given the Information Provided, What Are Some Possible Causes

X Inc and Y Inc Required:
Given the Information Provided, What Are Some Possible Causes