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Accounting policy choicesBackground to accounting policy choicesWhat is an accounting policy?An accounting policy is a decision made in advance about how, when and whether to record or recognize something. Choosing the location of an account in the financial statements is making an accounting policy choice.Choices in accounting methods1.Inventory cost flow assumptions – FIFO, LIFO and WA2.Valuing non-current assets:-Depreciation method (straight-line, reducing-balance, units-of-production)-Accounting for long-term investments (cost method, revaluation method etc.)3.Balance sheet assumptions-Should we capitalize (add to asset account) or expense (add to income statement).-Valuing receivables (estimating for ADD), a high ADD may overstate expenses (increases Bad Debt Expense).-Product development expenditures – capitalize or expensedmanagement discretion.-Computing amortization on intangible assets altering thelife of the intangible etc.Limitations of accounting statementsGenerally relates to the detailin which management discloses certain expenses, segments and liabilities.-Whether to disclose details of certain operating expenses-How much to disaggregate financial information for segments of a company-Amount of detail in accounting policy choice note-Contingent liabilities how much detail?Accounting estimates:-ADD influences expenses and A/R-Useful lives of plant and equipment, intangible assets greatly influences amortization rates-Valuation of assets when acquiring another company good will-Provisions for warranty liability and employee entitlements provisions
Events or transactions recognized (accounting recognition decisions):-Write-down for inventory obsolescence-Capitalization of cost of asset betterments-Recognition of intangible assets-