The following information was taken from the annual report of Busytown Industries.

a. Compute Busytown's conservatism ratio, and comment on how conservative the company's reporting methods are.b. Explain why the conservatism ratio provides a measure of the extent to which a company's financial accounting methods are conservative, and provide examples of accounting treatments that may increase or decrease the ratio.

Transcribed Image Text:

2011 2010 BALANCE SHEET S 9,700 Deferred income tax liability S8,300 INCOME STATEMENT S68,000 (20,400) $47,600 Income before taxes Income tax expense Net income Effective income tax rate: 38%