Nybrostrand Company: Income Statement

Account Debit Credit
Revenue 586,000
Cost of goods sold 264,500
Gross Profit 321,000
Expenses
Marketing 4,500
Depreciation Expense 24,350
Insurance 1,400
Property taxes 16,900
Rent 28,000
Salaries 78,500
Utilities 6,700
Net Profit 160,650

A careful analysis of the two income statements shows that there is a discrepancy between some critical variables. Thus, it might be seen that the company earned less money in 2013 according to the initial report. The difference between the gross profit variable as well as that between the net profit variables makes 42,000 dollars. Therefore, Nybrostrand Company earned more money in 2013 than it was actually reported.

The phenomenon is explained by the fact that the accountant that prepared the first income statement included 42,000 dollars in the total cost of the goods sold, while the purchase was not physically committed. As a result, the gross profit and the net profit in the initial income statement turned out to be lower than they actually were. From this perspective, it is essential to put a particular emphasis on the importance of the matching concept.

First and foremost, it is necessary to note that a matching concept is normally interpreted as a principle that is realized through “matching the expenses incurred during the period with the revenue that those expenses generated” (Warren, Reeve, & Duchac, 2015, p.16). Otherwise stated, this principle is some sort of a guideline that encourages a company to see to the fact that the reported expenses and revenues relate to the same period. When the matching concept is neglected, just as in the case with the two income statements of Nybrostrand Company, such critical variables as gross profit and net profit are, likewise, distorted.

In the meantime, experts point out that the matching concept is not easy to follow (Pandey, 2009). Hence, for instance, the discrepancy in the key variables in the two income statements is not the result of an accountant’s miscalculations. When the accountant included this figure in the transaction list, no one could know the transaction would be canceled. At the point, when the accountant included the 42,500 dollars in the cost of goods sold, the figure was already registered in the transaction list. The question, consequently, appears regarding the point at which the mistake was made. According to the matching principle, the accountant should have checked the current status of every transaction in order to make sure the particular goods had been physically sold. As a result, the matching concept is designed to prevent the accountants from registering the “non-existing” goods sold in their income statements.

The matching concept is important not only from the financial perspective but from juridical the point of view as well. Thus, experts point out that some companies can intentionally neglect the matching concept in order to report the wrong variables or, otherwise stated, to commit a fraud (Wells, 2013). In order to get a better idea of this mechanism, it is essential to look back at the example of Nybrostrand Company. Thus, the initial income statement contained the exaggerated cost of goods sold as it included the transaction that did not actually take place. Meanwhile, the sum of the revenues was indicated correctly. As the result, the company reported the understated gross profit and net profit. Unless the discrepancy had been identified, the company would have paid less tax. Hence, the key function of the matching principle resides in ensuring transparent and precise income reporting.

References

Pandey, I.M. (2009). Management Accounting. Delhi: Vikas Publishing House.

Warren, C.S., Reeve, J.M., & Duchac, J. (2015). Financial & Managerial Accounting. Boston, MA: Cengage Learning.

Wells, J.T. (2013). Corporate Fraud Handbook: Prevention and Detection. Hoboken, NJ: John Wiley & Sons.

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