The fact that generally accepted accounting principles allow companies flexibility in choosing between certain allocation methods canmake it difficult for a financial analyst to compare periodic performance from firm to firm.Suppose you were a financial analyst trying to compare the performance of two companies. Company A uses the double-declining-balance depreciation method. Company B uses the straight-line method. You have the following information taken from the 12/31/2024year-end financial statements for Company B:Depreciation expenseIncome StatementBalance SheetAssets:Plant and equipment, at costLess: Accumulated depreciationNetYou also determine that all of the assets constituting the plant and equipment of Company B were acquired at the same time, and thatall of the $160,000 represents depreciable assets. Also, all of the depreciable assets have the same useful life and residual values arezero.Required 1Required:1. In order to compare performance with Company A, estimate what B's depreciation expense would have been for 2024 if thedouble-declining-balance depreciation method had been used by Company B since acquisition of the depreciable assets.2. If Company B decided to switch depreciation methods in 2024 from the straight line to the double-declining-balance method,prepare the 2024 journal entry to record depreciation for the year, assuming no journal entry for depreciation in 2024 has yetbeen recorded.$ 8,000Complete this question by entering your answers in the tabs below.Required 2No1View transaction listIf Company B decided to switch depreciation methods in 2024 from the straight line to the double-declining-balance method, prepare the2024 journal entry to record depreciation for the year, assuming no journal entry for depreciation in 2024 has yet been recorded.Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field.$ 160,000(32,000)$ 128,000Transaction1View journal entry worksheetGeneral JournalDepreciation expenseAccumulated depreciation< Required 1Required 2>DebitCreditShow less A

Depreciation is the process of reducing the value of the assets. It is a non-cash expense of the…

The fact that generally accepted accounting principles allow companies flexibility in cho make it difficult for a financial analyst to compare periodic performance from firm to firm. Suppose you were a financial analyst trying to compare the performance of two compar balance depreciation method. Company B uses the straight-line method. You have the f year-end financial statements for Company B: Income Statement Depreciation expense $ 8,000 Balance Sheet Assets: Plant and equipment, at cost Less: Accumulated depreciation Net $ 160,000 (32,000) $ 128,000

The fact that generally accepted accounting principles allow companies flexibility in cho make it difficult for a financial analyst to compare periodic performance from firm to firm. Suppose you were a financial analyst trying to compare the performance of two compar balance depreciation method. Company B uses the straight-line method. You have the f year-end financial statements for Company B: Income Statement Depreciation expense $ 8,000 Balance Sheet Assets: Plant and equipment, at cost Less: Accumulated depreciation Net $ 160,000 (32,000) $ 128,000

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter6: Accounting Quality

Section: Chapter Questions

Problem 12QE: Financial accounting rules require firms to assess whether they will recover carrying amounts of...

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Which of the following statements is true? a. The fixed asset turnover ratio assists managers in determining the estimated future capital expenditures that are needed. b. The average age of the fixed assets is computed by dividing accumulated depreciation by depreciation expense. c. If net sales increases, the fixed asset turnover ratio will decrease. d. A relatively low fixed asset turnover ratio signals that a company is efficiently using its assets.
Numbers and descriptions match what really existed or happened. Economic entity assumption Kodak Company's income is projected to be lower than in previous years, so a switch from accelerated depreciation to straight-line depreciation is made in this year. Going concern assumption Presentation of timely information with predictive and confirmatory value. Monetary unit assumption Stable dollar assumption (do not use historical cost principle). Consistency characteristic The president of Selectron Corporation believes it is not necessary to report financial information on a yearly basis. The president believes that financial information should only be disclosed when significant new information is available related to the company's operations. Periodicity assumption The performance obligation is satisfied. Faithful representation characteristic Walgreen Pharmaceutical Corporation reports information…
As explained in this chapter, accounting theory allows firms to choose a depreciation method from several equally acceptable alternatives to allocate the cost of a long-term asset to expense over the useful life of the asset. In practice, however, most organizations use the straight-line method of depreciation for financial statement presentation and the Modified Accelerated Cost Recovery System (MACRS) for tax reporting purposes because the Internal Revenue Code allows firms to use an accelerated depreciation method on their tax returns, instead of the straight-line method they report under GAAP. Discuss why a company would choose to use straight-line deprecation for financial reporting purposes and an accelerated method for tax purposes. Speculate on why the tax code might allow firms to accelerate depreciation for investments in productive resources.
Identify which qualitative characteristic of accounting information is best described in each item below. (Do not use relevance and faithful representation.) a. The annual reports of Best Buy Co. are audited by certified public accountants. b. Black & Decker and Cannondale Corporation both use the FIFO cost flow assumption. c. Starbucks Corporation has used straight-line depreciation since it began operations. d. Motorola issues its quarterly reports immediately after each quarter ends.
(Analysis of Various Accounting Changes and Errors) Various types of accounting changes can affect the financial statements of a business enterprise differently. Assume that the following list describes changes that have a material effect on the financial statements for the current year of your business enterprise.1. A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction-type contracts.2. A change in the estimated useful life of previously recorded fixed assets as a result of newly acquired information.3. A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits.4. A change from including the employer share of FICA taxes with payroll tax expenses to including it with “Retirement benefits” on the income…
For each of the following situations, indicate whether you agree or disagree with the financial reporting practice employed and state the accounting concept that is applied (if you agree) or violated (if you disagree). Wagner Corporation adjusted the valuation of all assets and liabilities to reflect changes in the purchasing power of the dollar. Spooner Oil Company changed its method of accounting for oil and gas exploration costs from successful efforts to full cost. No mention of the change was included in the financial statements. The change had a material effect on Spooner's financial statements. Cypress Manufacturing Company purchased machinery having a five-year life. The cost of the machinery is being expensed over the life of the machinery. Rudeen Corporation purchased equipment for $180,000 at a liquidation sale of a competitor. Because the equipment was worth $230,000, Rudeen valued the equipment in its subsequent balance sheet at $230,000. Davis Bicycle Company received a…
After conducting a thorough review of the company’s fi nancial statements, Martinez concludes the following:Conclusion 1 Although Stellar’s fi nancial statements adhere to generally accepted accounting principles (GAAP), Stellar understates earnings in periods whenthe company is performing well and overstates earnings in periods whenthe company is struggling.Conclusion 2 Stellar most likely understated the value of amortizable intangibles whenrecording the acquisition of Solar, Inc. last year. No goodwill impairmentcharges have been taken since the acquisition.Conclusion 3 Over time, the accruals component of Stellar’s earnings is large relative tothe cash component.Conclusion 4 Stellar reported an unusually sharp decline in accounts receivable in thecurrent year, and an increase in long-term trade receivables.1 . Based on Martinez’s conclusions, Stellar’s fi nancial statements are best categorized as:A . non-GAAP compliant.B . GAAP compliant, but with earnings management.C . GAAP…
After conducting a thorough review of the company’s fi nancial statements, Martinez concludes the following:Conclusion 1 Although Stellar’s fi nancial statements adhere to generally accepted accounting principles (GAAP), Stellar understates earnings in periods whenthe company is performing well and overstates earnings in periods whenthe company is struggling.Conclusion 2 Stellar most likely understated the value of amortizable intangibles whenrecording the acquisition of Solar, Inc. last year. No goodwill impairmentcharges have been taken since the acquisition.Conclusion 3 Over time, the accruals component of Stellar’s earnings is large relative tothe cash component.Conclusion 4 Stellar reported an unusually sharp decline in accounts receivable in thecurrent year, and an increase in long-term trade receivables.2 . Based on Conclusion 2, after the acquisition of Solar, Stellar’s earnings are most likely :A . understated.B . fairly stated.C . overstated
Barber Technologies designs and develops software to be used for the management of inventory by both retailers and manufacturing firms. Over the past three years, the company has experienced significant competition and a declining market resulting in a significant deficit in retained earnings. In response to this condition, you have suggested that management consider the following: a. Recognize all asset impairments.b. Restructure the long-term debt by committing to make future payments that are less than the basis of the original debt.c. Adjust the par value of common stock to eliminate the deficit in retained earnings. Discuss how the above actions will likely affect: 1. The current ratio, debt-to-equity ratio, and return on equity. 2. The determination of net income in subsequent periods.
A company should use a depreciation method that: Group of answer choices is randomly selected best reflects the asset’s decline in revenue-producing ability for the company. maximizes net income for the company a different method each year
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