Given the information provided, what are some possible causes for the differing results of these companies?

Question

X Inc. and Y Inc. are virtually identical companies with identical cost structures

and very similar business practices operating in the same lines of business. X Inc.

is a public company based in Canada and follows IFRS while Y Inc. is a private

enterprise based in Canada and follows ASPE. The following were the condensed

income statements for both companies for the last year before both adopted

IFRS.

Answer 1

There could be many possible explanations for these differing results. Y Inc.'s net income is $100,000,
compared to X Inc.'s $300,000. Conversely, Y Inc.'s sales are twice those of X Inc. What is particularly
noteworthy is Y Inc.'s 20% gross margin compared to X Inc.'s 50% gross margin. This could be due to the
accelerated depreciation on Y Inc.'s property, plant and equipment or provisions made for future
maintenance costs.
Smoothing practices may have been applied to reduce Y Inc.'s income, and of course, its tax liability. Y
Inc.'s income may have been further reduced by higher estimates (for example: bad debt expense,
warranty costs and so forth) which are not necessarily be indicative of economic conditions.
Note: Once again, the above analysis is not necessarily exhaustive. Students may be able to identify other
valid differences.