Question

"Employing different accounting methods will yield different net incomes." How is this factor a limitation of financial statements?

a) It doesn't affect the accuracy of financial statements
b) It may lead to biased financial reporting
c) It simplifies financial analysis
d) It doesn't impact tax calculations

Answer 1

Different accounting methods can result in different net incomes, which is a limitation of financial statements. This may lead to biased financial reporting.

Step-by-step explanation:

Employing different accounting methods can indeed yield different net incomes, which is a limitation of financial statements.

One possible consequence of using different accounting methods is biased financial reporting. This occurs when companies intentionally choose accounting methods that make their financial statements look better, such as using aggressive revenue recognition practices.

For example, if a company has the option to choose between the first-in, first-out (FIFO) and last-in, first-out (LIFO) methods for valuing inventory, it can lead to different cost of goods sold and, consequently, different net income.