Question

Doctor Smith is contemplating the purchase of Dr. Johnson’s practice. Frank, his office manager, is about to prepare a worksheet combining the results of both practices so Dr. Smith can review it. Frank has a twelve-month financial statement for Dr. Smith’s office and a nine-month financial statement from Dr. Johnson’s office. Which of the following approaches is correct?
(A) The nine-month statement should first be annualized
(B) Consistency over time periods is not necessary, so Frank can proceed
(C) Neither of the above

Answer 1

Answer:

(A) The nine-month statement should first be annualized.

Explanation:

In accounting when preparing financial statements there is a standard period of financial statements that should be adhered to. The financial statements should be of the same duration. So comparing a nine month financial statement to a twelve month financial statement is against standard accounting practices.

Moreover it will not give a clear picture when comparism is done this way. For example if two companies both have income of about $1,000,000 and financial statements of nine and twelve months are compared. The company with nine months financial statement will show lower income than the one with twelve month statement, and this is not the reality.

So the nine month statement should be annualised to ease comparability.