Give at least three examples of how accounting numbers may affect social reality.
What will be an ideal response?
ANSWER:
Some examples of how accounting numbers affect social reality are as follows:
(1) In a period of rising prices, LIFO inventory valuation generally results in lower income and, therefore, lower income taxes.
(2) Income numbers can be instrumental in evaluating the performance of management, which can affect salaries and bonuses.
(3) Income numbers and various balance sheet ratios can affect dividend payment and security prices.
(4) Income numbers and balance sheet ratios can affect the firm’s credit standing and therefore the cost of capital.
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