Measuring Income Fairly: A Case Analysis

The income-measurement policies followed by Morris are neither fair nor reasonable. Comments on specific policies are as follows:

Revenue recognition on a cash basis may be reasonable if cash recognition is applied consistently for both income and expenses; the policy, however, is not fair to Stanley because the unrecognized credit purchases would boost net income under accrual recognition

Again, expensing inventory on a cash basis may be reasonable if cash recognition is applied consistently for both income and expenses; the policy, however, is not fair to Stanley because it overstates actual expenses in the short-run (an Stanley's payment for the business comes from profits in the first three years of ownership by Morris); Charging the Morris family personal expenses as a business expense is neither reasonable nor fair, as this policy unfairly (and improperly) lowers profit (such expenses should be charged to Morris' Drawing Account)

The salaries paid to the husband and two children of Morris are not reasonable (much too high for part-time help), and they are not fair, as they unfairly penalize Stanley by overstating expenses (understating profits)

Charging personal income tax to corporate expense accounts is neither reasonable (or even legal) nor fair to Stanley

Charging the full value of a long-life asset as an expense in a single year is grossly unfair to Stanley (in effect, this policy charges Stanley for the m

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Approximate Word count = 941
Approximate Pages = 4 (250 words per page)

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