A traditional GAAP income statement does not help managers to predict the financial results of their decisions.Which of the following is a reason for this shortcoming?
A)The GAAP statement is based on cost function rather than cost behavior.
B)The GAAP statement is based on classification rather than function.
C)The GAAP statement is based on cost behavior rather than cost function.
D)The GAAP statement is based on function rather than classification.

Question

Quizplus · Accepted Answer

GAAP income statements are based on historical cost accounting, which does not provide information on how costs will behave in the future. As a result, managers cannot predict the financial results of their decisions based on traditional GAAP income statements. The reason for this shortcoming is due to the fact that GAAP statements are based on cost function rather than cost behavior. Cost function refers to how costs change in response to changes in activity, while cost behavior refers to how costs are affected by changes in volume, activity, or other factors. Traditional GAAP income statements do not provide information on cost behavior, making it difficult for managers to predict future financial results.

A Traditional GAAP Income Statement Does Not Help Managers to Predict