Paula purchased a bakery from gianni fiori.The purchase agreement included a provison that required paula to pay gianni 25 percent of the bakerys profit in eachof the next 5 years. The agreement stated that the bakerys profit would be measured in fair and reasonable manner but not in accordance with the applicable financial standards.
In measuring profit paula used following policiies.
(a) revenue was recognized when cash was reveived from customers. most customers paid in cash but fer customers purchased and were allowed to pay in 30 days.
(b) paula set her annual salary at 60,000. she also paid 30,000 to her spouse and children tennage.these family memebers did not work in the business regularly but helped during busy days.
(c) the bakery had modern baking equipment valued at 50, 000at the time paula purchased company. the income statement for the first year included a 50,000 equipment expense related to these aasets.
(d) income taxes included the amount paid by the corporation as well as income taxes paid by various members of paula family.
Required
(a) discuss the fairness and reasonablennes of paula accounting policies?
(b)do you think that the net cash flow from operations (cash receipts minus cash payments) is high or lower than profit reported by paula? explain