Question

Dwight's Trophy Shop is considering the following accounting changes: Required: Classify each accounting change as elther conservative or aggressive. a. I increase the allowance for uncollectible accounts b. When costs are going up, change from LIFO to FIFO. Change from the straight-line method of depreciation to declining-balance in the second year of equipment with a 10-year life d. Record a smaller expense for warranties

Answer 1

we would compare on this basis

conservative: lower net income this year and higher net income in later years, high liquidity

Aggressive: higher net income this year and lower net income in later years., low liquidity

a)Aggressive, Allowance for the uncollectible accounts is a contra set account that reduces receivables account. If company is increasing such allowance, it means liquidity is reducing.

b) Aggressive, LIFO when cost rise means higher cost and less profit this year means conservative. If the company is changing from LIFO to FIFO, it means that the company wants to clear older stock of less price, which means less cost and high profit this year and to cover the higher cost of current output in later years. So, the company has changed its policy to Aggressive.

c)Conservative, In straight-line method company charges low depreciation in initial years as compared to declining balance. In declining method company charges high depreciation in initial years which means low profit in initial years. so this is conservative approach.

d)Conservative, As company is recording smaller expenses also, it is increasing cost and reducing profits and low liquidity. So this is conservative