You have been asked to prepare the financial statements for Neema Corp., a private Canadian corporation, for the year ended 31 December 20X4. The company began operations in early 20X4. The following information is available about its business activities during the year:

a. On 2 January, Neema issued no par common shares for $300,000.

b. On 3 January, machinery was purchased for $255,000 cash. It was estimated to have a useful life of 10 years and a residual value of $40,000. Management is considering using either the straight line amortization method or the declining balance method at twice the straight line rate.

c. On 4 January, Neema purchased 20% ownership in a long term investment, ABC Co., for $45,000. During the year, ABC paid dividends of $1,750 and earned net income of $8,000. Neema can use either the cost method or the equity method of accounting for its investment in ABC.

d. Inventory purchases for the year were, in order of acquisition:

Neema uses a periodic inventory system. There were 25,000 units in ending inventory on 31 December. Management is considering whether to use FIFO or weighted average as the inventory accounting method.

e. Sales during the year were $1,500,000, of which 90% were on account and 10% for cash.

f. Management has estimated that approximately 1% of sales on account will be uncollectible. During the year, $1,035,000 was collected on accounts receivable. When management scrutinizes the year end outstanding accounts, it estimates that approximately 6% of the accounts will prove uncollectible.

g. Additional operating expenses for the year were $550,000.

h. On 31 December, the company paid a $5,000 cash dividend on common shares.

i. On 31 December, accounts payable pertaining to operating expenses and inventory purchases totalled $154,000.

j. The cash balance on 31 December was $102,000.

REQUIRED:

1. Choosing from the alternative accounting policies described above, prepare a single step income statement for the year ended 31 December 20X4 that will produce the lowest net income.

2. What ethical implications are to be considered when selecting from among alternative accounting policies?

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Units Unit Cost Total Cost 50,000 $4.20 $ 210,000 80,000 4.25 340,000 30,000 4.30 129,000 15.000 4.40 66.000 175,000 $745.000