The information below was taken from the annual report of Busytown Industries. 1996 1995 Balance Sheet Deferred income tax liability Income Statement $ 9,700 $8,300 Income before taxes $ 68,000 Income tax expense (20,400) Net income $ 47,600 Effective income tax rate: 38% REQUIRED:

a. Compute Busytown’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.