Lesson 6 of 8 · All lessons in this module
  1. Reporting quality, earnings quality and the quality spectrum
  2. Conservative versus aggressive accounting
  3. Why managers misreport, and what keeps them honest
  4. Presentation choices and non-GAAP measures
  5. Accounting choices and estimates that manage earnings and the balance sheet
  6. Integrated cases: what accounting choices do to the numbers
  7. Choices that affect operating cash flow
  8. 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.

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