The purpose of the assignment is to evaluate any financial reporting choices that may result in a biased measure of the company's (WAG) net income. For both scenarios below, 1) describe the choice, 2) evaluate whether it is allowed under U.S. GAAP, 3) explain how it leads to an unfair measure of net income, and 4) propose an alternative choice that is in accordance with U.S. GAAP and would yield a fairer measure of net income.

Here are the given financial statements if needed.

WAG replaced its computer server with a new Dell server on January 3, 2011. The previous server had cost $1,650, had been depreciated straight-line over a two-year period with zero residual value, and was disposed of on eBay at a price equal to its book value ($619). The new server cost $2,400. As a result of the new website features, WAG increased the fee it charges artists for displaying and assisting in the sale of their artwork. Through March 31, 2011, the monthly fee was $20 per artist. Beginning April 1, 2011, the fee increased to $40 per artist. Although the artists were excited by broader exposure and increased traffic to WAG's site, they weren't thrilled with the increase in annual fees. Many of WAG's 165 artist members indicated that they were already struggling to make ends meet during these difficult economic times. EXHIBIT 2 WAG's Comparative Income Statements Wiki Art Gallery, Inc. Income Statements For the Years Ended September 30 2011 2010 Revenue from Sales and Service Artwork Sales Artist Fees $80,600 59.400 $30,400 39,600 140,000 70,000 Expenses Amortization Expense Bad Debt Expense Cost of Artwork Sold Depreciation Expense Dividend Expense Income Tax Expense Interest Expense Salaries Expense Web Maintenance and Other 125 297 22,375 386 3,200 18,836 720 29,500 1,500 198 20,000 825 4,800 560 1,200 31,500 8,500 Net Income $63,061 $2,417 Excerpts from the Notes to WAG's 2011 Financial Statements Note 1: Significant Accounting Policies Basis of Accounting The Company prepares its financial statements in conformity with U.S. generally accepted accounting principles. Revenue Recognition The Company records revenue from artwork sales when the Company and customer agree upon a selling price. The Company records revenue from artist fees as it is earned each month. Bad debts on artist fees are estimated by the percentage of credit sales method, using an average estimated rate of 0.5 percent. Write-offs are determined and recorded at each year-end. Inventory The Company records its inventory of artwork at the lower of cost or market. Cost is determined using the specific identification method for individual pieces and using average cost for art purchased in lots. Cost of artwork sold is recorded in the period of sale. Market value is estimated by the Company's management, taking into account the aesthetic of each piece. Equipment The Company records equipment at cost (see Note 3). Depreciation is recorded on a straight-line basis over the equipment's estimated useful life, which is currently estimated to be ten years. Intangible Assets The Company capitalizes intangible assets at the costs incurred to create those assets (see Note 3). Amortization is recorded on a straight-line basis over the useful life of the intangible assets, which is currently estimated to be six years. Note 2: Accounts Receivable 2011 2010 Receivables from Artwork Buyers Receivables from Artists Less: Allowance for Doubtful Accounts Accounts Receivable, Net $53,700 15,000 (250) $68,450 $3,200 3,900 (300) $6,800 Note 3: Equipment and Intangible Assets 2011 2010 Computer Equipment Less: Accumulated Depreciation $2,400 (180) $1,650 (825) 825 Equipment, Net Intangible Web Development, Net Capital Assets, Net 2,220 8,875 $11,095 $825 Note 4: Long-Term Debt 2011 2010 Note Payable, due May 31, 2017 $25,000 $20,000 WAG replaced its computer server with a new Dell server on January 3, 2011. The previous server had cost $1,650, had been depreciated straight-line over a two-year period with zero residual value, and was disposed of on eBay at a price equal to its book value ($619). The new server cost $2,400. As a result of the new website features, WAG increased the fee it charges artists for displaying and assisting in the sale of their artwork. Through March 31, 2011, the monthly fee was $20 per artist. Beginning April 1, 2011, the fee increased to $40 per artist. Although the artists were excited by broader exposure and increased traffic to WAG's site, they weren't thrilled with the increase in annual fees. Many of WAG's 165 artist members indicated that they were already struggling to make ends meet during these difficult economic times. EXHIBIT 2 WAG's Comparative Income Statements Wiki Art Gallery, Inc. Income Statements For the Years Ended September 30 2011 2010 Revenue from Sales and Service Artwork Sales Artist Fees $80,600 59.400 $30,400 39,600 140,000 70,000 Expenses Amortization Expense Bad Debt Expense Cost of Artwork Sold Depreciation Expense Dividend Expense Income Tax Expense Interest Expense Salaries Expense Web Maintenance and Other 125 297 22,375 386 3,200 18,836 720 29,500 1,500 198 20,000 825 4,800 560 1,200 31,500 8,500 Net Income $63,061 $2,417 Excerpts from the Notes to WAG's 2011 Financial Statements Note 1: Significant Accounting Policies Basis of Accounting The Company prepares its financial statements in conformity with U.S. generally accepted accounting principles. Revenue Recognition The Company records revenue from artwork sales when the Company and customer agree upon a selling price. The Company records revenue from artist fees as it is earned each month. Bad debts on artist fees are estimated by the percentage of credit sales method, using an average estimated rate of 0.5 percent. Write-offs are determined and recorded at each year-end. Inventory The Company records its inventory of artwork at the lower of cost or market. Cost is determined using the specific identification method for individual pieces and using average cost for art purchased in lots. Cost of artwork sold is recorded in the period of sale. Market value is estimated by the Company's management, taking into account the aesthetic of each piece. Equipment The Company records equipment at cost (see Note 3). Depreciation is recorded on a straight-line basis over the equipment's estimated useful life, which is currently estimated to be ten years. Intangible Assets The Company capitalizes intangible assets at the costs incurred to create those assets (see Note 3). Amortization is recorded on a straight-line basis over the useful life of the intangible assets, which is currently estimated to be six years. Note 2: Accounts Receivable 2011 2010 Receivables from Artwork Buyers Receivables from Artists Less: Allowance for Doubtful Accounts Accounts Receivable, Net $53,700 15,000 (250) $68,450 $3,200 3,900 (300) $6,800 Note 3: Equipment and Intangible Assets 2011 2010 Computer Equipment Less: Accumulated Depreciation $2,400 (180) $1,650 (825) 825 Equipment, Net Intangible Web Development, Net Capital Assets, Net 2,220 8,875 $11,095 $825 Note 4: Long-Term Debt 2011 2010 Note Payable, due May 31, 2017 $25,000 $20,000