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You will need to carefully read the the uploaded file. Respond to the two classmates who have already answered the questions in Case 3.2. Remember you are NOT to answer the questions in Case 3.2, you are to only answer to the two responses of the classmates located at the bottom, only after reading 3.2 and its questions your classmates responded to.  


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You will NOT answer Case 3.2. Instead you will read over 3.2. Then respond to the two classmate’s discussion post which is located below Case 3.2, Measuring Income Fairly Kim Morris purchased Print Shop, Inc., a printing business, from Chris Stanley. Morris made a cash down payment and agreed to make annual payments equal to 40 percent of the company's net income in each of the next three years. (Such "earn-outs" are a common means of financing the purchase of a small business.) Stanley was disappointed, however, when Morris reported a first year's net income far below Stanley's expectations. The agreement between Morris and Stanley did not state precisely how "net income" was to be measured. Neither Morris nor Stanley was familiar with accounting concepts. Their agreement stated only that the net income of the corporation should be measured in a "fair and reasonable manner." In measuring net income, Morris applied the following policies: a. Revenue was recognized when cash was received from customers. Most customers paid in cash, but a few were allowed thirty-day credit terms. b. Expenditures for ink and paper, which are purchased weekly, were charged directly to Supplies Expense, as were the Morris family's weekly grocery and dry cleaning bills. c. Morris set her annual salary at $60,000, which Stanley had agreed was reasonable. She also paid salaries of $30,000 per year to her husband and to each of her two teenage children. These family members did not work in the business on a regular basis, but they did help out when things got busy. d. Income taxes expense included the amount paid by the corporation (which was computed correctly), as well as the personal income taxes paid by various members of the Morris family on the salaries they earned working for the business. e. The business had state-of-the-art printing equipment valued at $150,000 at the time Morris purchased it. The first-year income statement included a $150,000 equipment expense related to these assets. Responses of your classmates were made to the following discussion questions  Discuss the fairness and reasonableness of these income-measurement policies. (Remember, these policies do not have to conform to generally accepted accounting principles. But they should be fair and reasonable.)  Do you think that the net cash flow generated by this business (cash receipts less cash outlays) is higher or lower than the net income as measured by Morris? Explain. NOW in a minimum of 100 words each per question. Reply to the two classmates below 1. Read Amanda’s post below. In 100 words or more how would you reply to Amanda’s post In measuring net income, we must understand that the accrual basis of accounting recognizes revenue in the accounting records when it is earned and recognizes expenses when the related goods or services are used. As the textbook explains it is to measure the profitability of the economic activities conducted during the accounting period. It seems to me that Williams was using a Cash basis accounting for the collection of cash as revenues. This system measure the amount of cash received and paid during a period but it is not a good measure of the "profitability of activities" undertaken during the period. The matching principle states that we must match expenses with the period in which they are used. Secondly, the Morris family’s weekly grocery and dry cleaning bills are not a business expenditure. These expenses are not related to the cost of goods or services used up in the process of earning revenue. And lastly expenses decrease owners’ equity. Stanley, was not aware of the salaries Morris was paying to her husband and two teenage children. Even though it was not specified in the contract, she had a moral responsibility to discuss it with Stanley, her actions are unethical for incurring these expenses without Stanley consent. Furthermore, an employer is responsible for deducting payroll taxes out of salary earned and paying employer’s share to the different agencies, however, businesses are not responsible for paying employees personal income taxes. The net cash flow generated by this business is lower due to the way the information was entered in the income statement. Net income is a computation of the overall effects of many business transactions on owners’ equity. It does not consist of any cash or any other specific assets. One of the roles of accounting is to maintain documentary evidence of the activities of a company and supportive documents for instance Internal Revenue Service when filing tax returns, it is obvious that Morris was not following, rules, regulations and policies when recording their business transactions. 2. Read Claribel’s post below. In 100 words how would you reply to Claribel’s post When considering the fairness and reasonableness of the income-measurement policies of Morris at the time of measuring net income, the way in which revenue was reported was fair and reasonable. It is reasonable to include only the revenue that was received during the year, while it is not fair to include revenue that a company will receive in the future because of credit. It would be inaccurate for a company to include revenue that is not yet received by the company. Revenues are reported at the time in which they are received. Also, the expenditure for ink and paper were recorded in a reasonable manner because the products sold depended in the acquisition of these items. On the other hand, it was not fair to include the Morris family's weekly grocery and dry cleaning bills because these are personal expenses that should've come out of their salary and not from the company's income. On the other hand, I do not think paying $30,000 to each of the teenage children was reasonable due to the fact that they only worked partially. In my opinion, Morris should've waited for the first year before setting a salary for the children because Kim was not sure of how much income the company would produce. Additionally, if the printing equipment was purchased for $150,000 and is going to last for many years, it would've been reasonable and fair that Morris would've divide the amount in equal parts for different years, let's say for 5 or 10 years because these equipment are going to be used for more than one year. In my opinion, the net cash flow generated by this business was higher than the net income as measure by Morris. If the net cash flow generated would've been lower, then the company would've have a loss. After subtracting expenses from the revenue, Stanley was not happy but I believe the net income was somewhat high and it would've been higher if Morris take off some of the expenses that are not reasonable. In order to be net income, the net cash flow should be higher, otherwise it would be a loss.
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