1. A new manager of a retail company suggests that the company should prepare its income statement on the basis of cash receipts and cash expenditures (except for the acquisition of fixed assets, such as plant and equipment). He argues that managers, investors, creditors, and others are more interested in cash receipts and disbursements than in accrual-based accounting.
Do you think he is correct? Explain.
2. In what situations would the going concern assumption not be useful to management?
3. What arguments can be given that the historical cost framework should be abandoned?
4. How can the element of personal judgment, which is involved in such matters as estimates of salvage value and useful life, be minimized to preserve the objectivity of an accounting system?