Practice Quiz

CLEP Accounting

Category - Accounting

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Bertha is about to be audited. Which of the following practices should she be concerned about, as it is unethical and possibly illegal?
  1. Depreciating an asset using the double declining method.
  2. Using FIFO to determine the cost of inventory.
  3. Declaring Goodwill as an asset on her balance sheet.
  4. Changing the inventory costing method to improve income within a certain accounting period.
  5. Depreciating an asset using the straight-line method.
Explanation
Answer - D - Changing the inventory costing method to improve income within a certain accounting period is an unethical practice.

Key Takeaway: Companies should change the costing method for inventory only for good cause and not in the middle of an accounting period. It should not be changed just to improve income in a certain period. It is important to note that both FIFO and LIFO comply with GAAP. Depreciating an asset over its useful life is a necessary practice for long-lived assets. Goodwill should be declared as an asset when one business buys another business for more than fair value.
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