Depreciation Flashcards
Reducing Balance method
Straight-line method
The reducing balance method allocates more depreciation in the early years of an asset’s life, and less in the latter years.
The straight-line method allocates the same amount of depreciation in every period until the asset
reaches its residual value
Switching method of inventory valuation to IC. Refer to one qualitative characteristic
With regard to qualitative characteristics of accounting, the owner is satisfying faithful
representation by changing to the Identified Cost method. This is the most accurate method of
inventory valuation as it is based on the actual cost prices of the inventory being sold. However, by
changing inventory methods the owner may be in danger of breaching the QC of comparability.
Changing methods will make the comparison of results from period to period very difficult. This
adds to the ethical dilemma created by the owner’s approach to inflating profits. This would make it
even more difficult for a prospective owner to make an informed decision about buying the
business. The owner has clearly created an ethical dilemma and perhaps should be more open
and honest and not change inventory methods because of this.
Switching method of inventory valuation from FIFO to IC. The ethical issueS
If the owner is attempting to sell their business by inflating profits and inventory values, it clearly
creates an ethical issue. A prospective buyer may be tricked into paying an inflated price for the
business while under a misconception of its value. However, if the business is not sold in the near
future, this plan may backfire. Once the cheaper inventory has been sold, the business may be
stuck with the more expensive items of inventory. Given that it is selling health products, which
usually have use-by-dates, the decision of the owner may be short-sighted. The items remaining
have a higher cost price, will be closer to their use-by-date and the owner may be desperate to sell
them, which could create a second ethical issue. Does the owner inform their customers that the
goods on hand are older? Does he discount the selling price to try to get rid of these units? This
may have a negative impact on profit but it may also cause damage to the reputation of the
business
