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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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Solution Summary

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 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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Solution provided by:
  • Chartered Accountant (Equivalent to CPA in US), Institute of Charted Accountants of India
  • Bachelor of Commerce, West Bengal University
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