Incomplete Transactions Company was started on January 1, 2009. During its first year of operations, the company had a choice of accounting policies. The chief financial officer identified the following as possible alternatives and provided the underlying assumptions/ estimates for each:

The following are the actual transactions for the first three years of operations:

Required:
a. Derive net income for 2009, 2010, and 2011. Ignore income taxes.
b. What is the cumulative income for the three years for the two sets of accounting policies? What does this tell us about the closing balance sheet at the end of the third year?
c. What are the cumulative operating cash flows for the three years for either set of accounting policies? Why are these cumulative cash flows the same for the two sets of policies?
d. Carefully explain why the net incomes for each of the three years under review are not the same. What does this tell us about accruals and allocation methods?

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Accounting policy Accounting policy set A set B Avcrage coxt Allowance : 10% of closing gross accounts receivable Allowance: An analysis of sales and repairs Inventory ion FIFO Bad debts 6% of sales Warranties 4% of sales 2009 2010 2011 Sales (all on accounts) $11,000,000 S12,000,000 $12,800.000 Inventory purchases (paid immediately) 5,000,000 2,000,000 1,800,000 3,500,000 2,300,000 2,000,000 3,700,000 2,500,000 2,500,000 Ending inventory value, Ending inventory value, average cost Collections Amounts actually written of 9,000,000 10,500,000 13,270,000 600,000 300,000 650,000 800,000 Warranties actually paid Estimated warranties 460,000 502,000 payable ending balance based on aging analysis of sales 50,000 180,000 170,000 Depreciation expense All other operating expenses (paid immediately) 1,000,000 1,000,000 1,000,000 3,000,000 3,300,000 3,900,000