The information below was taken from the annual report of Sega-Venus Enterprises. (Appendix 10B: conservatism ratio) 1 996 1995 Balance Sheet Deferred income tax liability Income Statement $ 18,300 $19,400 Income before taxes Income tax expense Net income $145,500 (54,000) $ 91,500 Effective income tax rate: 34% REQUIRED:

a. Compute Sega-Venus’s conservatism ratio, and comment on how conservative the com¬ pany’s reporting methods are.

b. Explain why the conservatism ratio provides a measure of the extent to which a company’s financial accounting methods are conservative, and provide examples of accounting treat¬ ments that may increase or decrease the ratio.