Lesson 6 of 8 · All lessons in this module
- Reporting quality, earnings quality and the quality spectrum
- Conservative versus aggressive accounting
- Why managers misreport, and what keeps them honest
- Presentation choices and non-GAAP measures
- Accounting choices and estimates that manage earnings and the balance sheet
- Integrated cases: what accounting choices do to the numbers
- Choices that affect operating cash flow
- Warning signs and how to detect manipulationVideo lesson
Lesson 6 of 8 · 16 min
Integrated cases: what accounting choices do to the numbers
Choices and estimates are not only a list of levers: each one has a computed effect on profit and on the balance sheet, and an analyst who can size it can say which direction a company is leaning.
In short
- FIFO against weighted average (periodic) differs only in how the same cost of goods available is split: higher ending inventory and gross profit under FIFO when costs rise.
- Double-declining balance applies twice the straight-line rate to the declining gross carrying amount, ignores salvage until the end and must stop at salvage; total depreciation is the same across methods, only the timing differs.
- Units of production charges a rate per unit; a heavy early output means a heavy early charge.
- An estimate such as the bad-debt rate or the useful life can change profit with no change in the business; size it and compare with peers.
- Pretax profit is flattered by FIFO, straight-line over a longer life and a lower allowance rate; stack the effects and compare them with reported profit.
Unlock this lesson free for 7 days
Create a free account to get 7 days free: every lesson, video and flashcard, and the question bank. No card needed.