Question

Analyse and discuss how each of the below accounting methods provide management with ability to influence profit of the company. Provide examples.

• Uncollectible accounts
• Inventory
• Depreciation
• Depletion
• Amortization
• Non-operational and non-recurring items

Answer 1

1.Uncollectible accounts: It is upto the management's discretion to create a provision for uncollectible amounts. The percentage of net credit sales which need to be recognized as uncollectible will help the management influence the profits for the year.

2. Inventory:Inventory should be valued at cost or NRV, whichever is less. If the management does not recognize a loss in the value of the inventory below its cost, the profits will be affected. The method of inventory valuation (FIFO, LIFO or weighted average) will also influence the profits.

3. Depreciation: Assets can be depreciated as per various methods. Straight line method allocated depreciation equally over the useful life of the asset, whereas some companies choose to go for double declining method in which a major portion of the cost of the asset is depreciated in the beginning years of the life of the asset, as the early years are considered to be more productive during an asset's life. Thus, the profits will tend to be lower in double declining method compared to straight line method during the inital years of the asset.

4. Depletion: Depletion is used for natural resources like mining, timber, petroleum etc. The concept here is same as depreciation. The method of depletion will help the management influence the profits.

5.Amortization: This is also similar to depreciation, except amortization is done for intangible assets. Determing the value of intangible assets, and defining its useful life are some of the accounting methods which can be used by the management to influence the profits.

6. Non- Operational and non-recurring items: Any positive non-recurring items increase the future earnings prospects for a company which improves companies' profitability. Sometimes, the management chooses to not recognize such items, which influences the profits of the company