Question

Comparisons of income can be very difficult for two companies even though they sell the same products in equal volume. Why?

Short answer

Income of two companies cannot be compared easily because of the inconsistencies in the accounting and reporting policies adopted by the company while recording the revenue.

Step-by-step solution

Income statement

Income statement is prepared to show the revenue earned by the company and the expenses incurred to earn that profit. It is a component of the financial statements.

Comparison of income between the two companies

The comparison of income is difficult because each company use different accounting policies or methods to record the revenue transactions. For example, some companies may defer the recognition of revenue that comes via installment plan while the some companies may record it all right away. Some companies may use LIFO accounting method to record inventory and some may use FIFO accounting method.