Question

Why should caution be exercised in the use of the net income figure derived in an income statement? What are the objectives of generally accepted accounting principles in their application to the income statement?

Short answer

There are many assumptions and estimations made in the accounting, and income is reported according to these assumptions. The objectives of generally accepted accounting principles are to report the results of operations.

Step-by-step solution

Generally Accepted Accounting Principles

Generally Accepted Accounting Principles are the set of basic guidelines and rules issued by the Financial Accounting Standards Board to improve the quality of financial statements.

Importance of exercising caution

Exercising caution is required because various assumptions are followed in the accounting process,and outcomes such as net income represent those considerations.

If suchassumptionsare not appropriately applied, it may provide inaccurate results.

Objectives of GAAP

The objectives of GAAP linked with the income statement are as follows:

• The primary objective of the GAAP is to ensure that thetransactions belonging to a specific period should be reported in the same period.
• The application of GAAP also ensures that no artificial information should be recorded in the books.