3.2 - the salary to her spouse and children has the impact...

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Case 3.2 1 – No this policy is not reasonable and the revenue should be recognized as soon as the services are performed. Morris here is recognizing revenue, when the cash is received, which reduce the net income. 2 – The supplies should be charged as and when used, and till the time they are not used, they should be accounted in a separate account namely supplies. Also Morris personal expenses should not be charged to income for the printing shop. This also reduces the net income available to Stanley. 3 – The provision of salary to Morris husband and her children should be pre-approved and on an arm length transaction basis considering the number of hours spent by them in business. Paying
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Unformatted text preview: the salary to her spouse and children, has the impact of reducing the net income. 4 – The personal income taxes paid by Morris family members, should not be part of the printing shop expense. This has the effect of reducing the net income. 5 – The printing machine expense, should be depreciated over the life of the asset, instead of charging of the assets in the first year itself. Part B The net cash flow generated by the business is higher as compared to the net income reported by Morris. The lower net income is due to the high amount of personal expenses charged to income statement and charging off the printing machine value in the first year itself....
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