Consider the following five reporting situations:
Case A The financial statements of Raychem Corporation included the following note: During the current year, plant assets were written down by $ 8,000,000. This writ-edown will reduce future expenses. Depreciation and other expenses in future years will be lower, and as a result this will benefit profits of future years.
Case B During an audit of the Silvona Company, the audit manager observed that certain liabilities, such as income taxes, seemed to be overstated. Also, some potentially obsolete inventory items seem to be undervalued, and the tendency is to expense rather than capitalize as many items as possible. Management states that “ the company has always taken a very conservative view of the business and its future prospects.” Management suggests that it does not wish to weaken the company by reporting any more earnings or paying any more dividends than are absolutely necessary because it does not expect business to continue to be good. Management points out that the lower valuations for assets do not cost the company anything but do create reserves for “ hard times.”
Case C There was no comment or explanation of the fact that Simone Limited changed its inventory method from FIFO (first- in, first- out) to average cost at the beginning of the current reporting period. A large changeover difference was involved, and there was no retrospective restatement.
Case D Current assets amounted to $ 314,000 and current liabilities, $ 205,000; the balance sheet of Nelta Corp. reported a single amount “Working capital, $ 109,000.” Case E In 20X1, the Tryler Corporation switched its inventory method for financial reporting from LIFO ( last- in, first- out) to FIFO due to a change in accounting standards that prohibits LIFO. Tryler publicly explained, “ Our major competitors have consistently used the FIFO method. Therefore, the reported loss for 20X1 and the restated profit for 20X0 are on a comparable basis as to inventory valuation with competitors.” The impact on open-ing balances is not material.
Analyze each of the preceding situations and indicate which accounting principles, as described in this chapter, are applicable in each situation.