Question 4 - Intermediate Accounting (Kieso)

Question

Identify at least two situations in which application of different accounting methods or accounting estimates results in difficulties in comparing companies.

Step-by-Step Solution

Answer

The changes made by the business entity in its inventory valuation methods and depreciation methods lead to difficulties in the comparison process. 

Accounting Methods

Accounting methods are the procedures and rules used to report the expenses and revenues followed by a company. Cash and Accrual accounting are the two main methods of accounting.

Different accounting methods leading to difficulties

Identification of two situations:

• Changes in inventory methods: Changes in inventory methods such as LIFO to FIFO make the comparison complicated because both methods provide distinct outcomes. 
• Changes in depreciation methods: Each depreciation method provides different results. Hence, changing depreciation computation from the straight line to the diminishing value method may lead to difficulty in comparing companies.