Lindsay Smith is a doctor who has owned her own practice for ten years. The practice...

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Lindsay Smith is a doctor who has owned her own practice for ten years. The practice is successful and sees several new clients each month. With the practice's anticipated growth, Lindsay hired an in-house bookkeeper in year two. The bookkeeper has been responsible for the daily, monthly, and annual accounting transactions. The subsequent financial statements are then sent to a local accounting firm for annual tax preparation.Lindsay believed she could charge all expenses to one credit card and they would be categorized into the correct expense accounts. She failed to communicate with her bookkeeper that a large number of personal expenses, including her car payment, personal grocery trips, meals, and family vacations were included on the credit card. Her bookkeeper, under the assumption all credit card charges were related to business activities, coded the credit card payments as general business expense. Additionally, the tax preparer relied on the financial statement information without paying closer attention to the general ledger. Consequently, the practice's prior year tax returns reflect an incorrect picture of the practice's financial position. The issue has unsurfaced with the possibility of a new doctor joining the practice as a partner. While preparing a compilation of financial statements for the potential partner's review, the accounting firm inquired into the nature of the general business expense account. Lindsay must provide accurate financial statements to the potential new partner as part of the partnership agreement. Question: What effect does this oversight have on net income and why is it significant? Lindsay Smith is a doctor who has owned her own practice for ten years. The practice is successful and sees several new clients each month. With the practice's anticipated growth, Lindsay hired an in-house bookkeeper in year two. The bookkeeper has been responsible for the daily, monthly, and annual accounting transactions. The subsequent financial statements are then sent to a local accounting firm for annual tax preparation.Lindsay believed she could charge all expenses to one credit card and they would be categorized into the correct expense accounts. She failed to communicate with her bookkeeper that a large number of personal expenses, including her car payment, personal grocery trips, meals, and family vacations were included on the credit card. Her bookkeeper, under the assumption all credit card charges were related to business activities, coded the credit card payments as general business expense. Additionally, the tax preparer relied on the financial statement information without paying closer attention to the general ledger. Consequently, the practice's prior year tax returns reflect an incorrect picture of the practice's financial position. The issue has unsurfaced with the possibility of a new doctor joining the practice as a partner. While preparing a compilation of financial statements for the potential partner's review, the accounting firm inquired into the nature of the general business expense account. Lindsay must provide accurate financial statements to the potential new partner as part of the partnership agreement. Question: What effect does this oversight have on net income and why is it significant?

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The inclusion of personal expenses in the general business expense account leads to an overstatem... View the full answer