Accounting: Tools for Business Decision Making, 5th Edition

Published by Wiley
ISBN 10: 1118128168
ISBN 13: 978-1-11812-816-9

Chapter 13 - Financial Analysis: The Big Picture - Questions - Page 728: 23


During the period of continuing inflation, the choice of accounting methods: (a) Use of FIFO instead of LIFO for inventory costing (b) Use of a 6-year life for machinery instead of a 9-year life (c) Use of straight line depreciation instead of accelerated declining-balance depreciation

Work Step by Step

(a) By use of FIFO method, the cost of goods sold will be lesser and the closing inventory will have high value. This will increase the gross income and net income. (b) By use of 6-year life of machinery, the depreciation will be more, so the income will be less. (c) A method in which companies expense an equal amount of depreciation for each year of the assets' useful life. Accelerated depreciation method that produces higher depreciation expense in the early years than the straight-line approach.
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