On February9, 2002, an article in The Economist stated that thehigh-tech industry seems to be inventing new accounting documents and rules.Non-standard "pro-forma" accounting is popular. Earnings are not calculated according toGAAP, but by creating unique formulas that exclude"special expenses." This tends to improve the bottom line. In January2002, Amazon announced three different kinds ofprofit: $5m net profit in the previousquarter, calculated underGAAP; $59m"pro-forma operatingprofit;" and$35m "pro-forma netprofit." "Pro-forma operatingprofit" excludes stock optionexpense, amortization ofgoodwill, and restructuring costs."Pro-forma netprofit" excludes currency gains and losses and the"cumulative effect of change in accountingprinciple."

Requirement

Discuss the pros and cons of the types of disclosures described above.

First, select the pros of the types of disclosures described above. (Select all that apply. Leave unused cellsblank.)

Choices

1.Amazon provides full disclosure of the accounting policies that have been used to come up with the alternative income numbers.

2.Given the full disclosure, sophisticated readers can interpret these numbers and undo Amazon's policies if they wish.

3.Information is provided in addition to GAAP income, so at least the GAAP number is reliable as it is audited.

4.Measuring income excluding certain costs provides management with the incentive to classify costs into those categories.

5.Non-standard "pro-forma" information has been accepted as GAAP.

6.The accounting method is popular in the high-tech industry so the information is comparable to those of similar firms.

7.The alternative income number could be more relevant for predicting future cash flows by removing items that are not recurring.

8.These disclosures are necessary to the users of the financial statements in order to compute the current ratio properly.

9. These dislosures are not acceptable and are confusing to the readers of the financial statements.