ECON 4720 International Trade and Finance - Complete study guide for Quiz 2

Depreciation schedule choices: 1) Accelerated Depreciation (lower taxes) MACRS (modified
accelerated cost revocery). 2) Straight-line method of depreciation (used by most companies
for reporting pruposes, produces a smoother earnings stream & higher earnings in the early
years of the depreciation period. Comapiens can misclassify operation expenses as capital
expenditures.
If company depreiciates fixed assets over 7y instead of 10y = no affect of physical assets.
Fized assets on the BS would decline. NI would decline. Tax payments would decline. Cash
position would improve. + taxes were reduced, the reduced aount increases the tax position.
One method for tax purposes & one method for GAAP.
Effects on sales revenue – sales or revenues – allowance for doubtful accounts. The allowance
account should reflect: the volume of credit sales, the firm’s customer base & past experience
with customers, the firm’s credit policies & collection practices, economic conditions,
underestimation bad debt expense will boost net income.
Inventory – LIFO (last in first out) & FIFO (first in first out). During inflation LIFO produces
lower earnings than FIFO or average cost. During periods of falling prices, LIFO produces
higher earnings than FIFO. The inventory accounting system used by the company is
deceived in the not to the financial statements that details accounting produces or the note
discussing inventory.
COGS – Loss recognitions on Write-Downs of Inventories. The principle of conservatism in
accounting requires that firms carry inventory in the accounting records at the lower of cost or
market. If the value of inventory falls below original costs, the inventory is written down to
market value. The amount of the write-down will affect comparability, thus quality of the
profit margins. Hen te write-down of inventory is included in the COGS, the GPM is affected
in the year of the write-down. Significant amounts show up extra-ordinary items.
Operation expenses – discretionary expenses. A company can increase earnings by reducing

variable OE in a number of areas: repaid & maintains of capital assets, research &
development, advertising & marketing. (OBS: if we don’t spend this money this year, we
might spend it next year. Might affect future earnings) If such discretionary expenses are
reduced primarily to benefit the current year’s reported earning, the long-run impact on OP
may be detrimental.
Non-operating revenue & expense – when a company sells a capital asset, the gain or loss is
included in NI for the period. The sale of a major asset is sometimes made to increase