You are CFO of Goforit, Inc., a wholesale distribution company specializing in e

Question

You are CFO of Goforit, Inc., a wholesale distribution company specializing in emerging technologies. Your CEO is a brilliant marketer, but relies on you to explain issues and choices in accounting and finance. She has heard from other members of a CEO organization to which she belongs that a company’s net income can vary widely depending on which accounting choices are made from the “GAAP menu.” Assuming the goal is to maximize net income, choose an accounting treatment from each of the following scenarios, and explain to your CEO why the choice will produce the desired effect on reported net income for the current year. Include in your answer the effect of the choice on both the income statement and balance sheet. Required: 1: Goforit carries significant electronics inventory in a competitive environment in which prices are actually falling. Which inventory valuation method would you choose—LIFO, FIFO, or average cost? Assume that unit purchases exceed unit sales. 2: Goforit has a large investment in warehouse equipment, including conveyor belts, forklifts, and automated packaging systems. Which depreciation method would you choose: straight line (SL) or double declining balance (DDB)

Explanation / Answer

            LIFO: When prices are falling using LIFO method Ending Inventory is higher & total current assets are higher since more expensive goods purchased earlier constitute inventory. The cost of goods sold is lower and gross profit is higher since goods sold constitute goods purchased when prices are falling.

2. The depreciation method to be chosen to increase profits is Straight Line (SL) method. The straight-line method reduces profit by the same amount each accounting period, the other methods cause a company’s profit to fluctuate with all else being equal. The double-declining-balance method causes lower profit in the earlier years of an asset’s life than in the later years due to the greater depreciation expense in the earlier years. The depreciation under double-declining-balance method is double the depreciation under straight line method in the current year.

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