Question

The independent auditor of Fluidity Inc. found the following situations:
a. The company uses the straight- line method of measuring depreciation on manufacturing machinery, even though it knows that a method based on actual usage would provide better matching, more accurate income determination, and thus better information for financial statement users. However, the company uses the straight- line method because of the level of data needed to implement a usage method. The straight- line method is significantly cheaper to calculate.
b. For inventory valuation, Fluidity switched from FIFO to average cost and then back to FIFO for the same items during a five- year period.
c. Fluidity does not provide information about future contracts, called the “order backlog,” in its financial statements. Such disclosure is quite common in the industry.
d. Fluidity follows a policy of depreciating plant and equipment on the straight- line basis over a period of time that is 50% longer than the historic use of similar equipment. e. In its annual financial statements, the company reports interest expense as the net amount of interest expense less interest revenue. The amounts are very small, relative to the scale of Fluidity’s business activities.

Required:
1. Identify and briefly explain the accounting principle that is directly involved in each situation.
2. Indicate what, if anything, the company should do in the future by way of any change in accounting policy.



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  • CreatedFebruary 17, 2015
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