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1. Discuss why you feel that GAAP allows so many alternative methods for valuing inventories and computing depreciation.

2. Identify the factors that you, as a manager, would consider in chosing among the alternative inventory and depreciation methods allowed by GAAP.

3. Discuss what you feel might happen if all the firme were forced to use the same method. For eg. assume that instead of allowing for several alternative inventory and depreciation methods, GAAP simply required all the firms to use the straight line depreciation method and FIFO inventory method. Do you think that by requiring all the firms to use the same methods, the usefulness of financial statements would be increased or decreased? Explain.

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GAAP provides different methods for valuing inventories and computing depreciation. These methods are used in accounting to get a correct value of the assets.

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GAAP provides different methods for valuing inventories and computing depreciation. These methods are used in accounting to get a correct value of the assets.

The different methods of valuing inventories are LIFO, FIFO and average cost method. In the FIFO method, the cost is calculated on the basis the purchases are made while in LIFO method, cost is calculated in the reverse order. The average cost method produces a cost flow based on a weighted average of unit costs. A company whose latest inventory is sold more than the older one should use the FIFO method and a company who first sells its older items rather than the new ones should use the LIFO method.

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GAAP Adjustments in International Accounting

Ipat International Ltd provided the following reconciliation from IFRS to US GAAP in its most recent annual report.

................................................................................................................Net Income Shareholders Equity
As stated IFRS............................................................................541,713 7,638,794
U.S GAAP Adjustments
(a) Reversal of additional depreciation charges
Arising from revaluation of fixed assets..............................................85,720 643,099
(b) Reversal of revaluation surplus of fixed assets................................0 (977,240)
As stated under US GAAP .........................................................627,433 7,305,653

(a) Explain why US GAAP adjustment (a) results in an addition to net income. Explain why US GAAP adjustment (a) results in an addition to shareholders equity that is greater than the addition to net income. What is the shareholders equity account affected by adjustment (a)?
(b) Explain why US GAAP adjustment (b) results in a subtraction from shareholders equity but does not affect net income. What is the shareholders equity account affected by adjustment (b)?

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