Which of the following statements is CORRECT?
A) The focal point of the income statement is the cash account, because that account cannot be manipulated by "accounting tricks."
B) The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow generally accepted accounting principles (GAAP).
C) The reported income of two otherwise identical firms must be identical if the firms are publicly owned, provided they follow procedures that are permitted by the Securities and Exchange Commission (SEC).
D) If a firm follows generally accepted accounting principles (GAAP), then its reported net income will be identical to its reported cash flow.
E) The income statement for a given year, say 2008, is designed to give us an idea of how much the firm earned during that year.

Question

Quizplus · Accepted Answer

The income statement shows the earnings of the firm during a given period, such as a year. Therefore, statement E is correct. Statement A is incorrect because the income statement includes many accounts that could be manipulated by accounting tricks, and cash is just one of them. Statement B is incorrect because different accounting procedures could lead to different reported incomes. Statement C is incorrect because even if two firms follow procedures permitted by the SEC, they can still use different accounting methods that could result in different reported incomes. Statement D is incorrect because reported net income and reported cash flow are two different items that could be different due to factors such as depreciation, changes in working capital, and other non-cash items.

Which of the Following Statements Is CORRECT