In each case below, accounting conventions may have been violated.

1. After careful study, Kipling Company, which has offices in 40 states, has determined that its method of depreciating office furniture should be changed. The new method is adopted for the current year, and the change is noted in the financial statements.

2. In the past, Cortes Corporation has recorded operating expenses in general accounts (e.g., Salaries Expense and Utilities Expense). Management has determined that despite the additional recordkeeping costs, the company’s income statement should break down each operating expense into its components of selling expense and administrative expense.

3. Fitz Corporation’s auditor discovered that a company official had authorized the payment of an $800 bribe to a local official. Management argued that because the item was so small in relation to the size of the company

($1,500,000 in sales), the illegal payment should not be disclosed.

4. Glowacki’s Bookstore built a small addition to its main building to house a new computer games section. Because no one could be sure that the computer games section would succeed, the accountant took a conservative approach and recorded the addition as an expense.

5. Since it began operations ten years ago, Xu Company has used the same generally accepted inventory method. The company does not disclose in its financial statements what inventory method it uses.

Required User Insight: In each of these cases, identify the accounting convention that applies, state whether or not the treatment is in accord with the convention and generally accepted accounting principles, and briefly explain why.

Forms of the Income Statement