Assume you work as an assistant accountant in the head office of a national movie rental business, a la Blockbuster Inc. With the increasing popularity of online movie rental operations, your company has struggled to meet its earnings targets for the year. It is important for the company to meet its earnings targets this year because the company is renegotiating a bank loan next month, and the terms of that loan are likely to depend on the companys reported financial success. Also, the company plans to issue more stock to the public in the upcoming year, to obtain funds for establishing its own presence in the online movie rental business. The chief financial officer ( CFO) has approached you with a solution to the earnings dilemma. She proposes that the depreciation period for the stock of reusable DVDs be extended from 3 months to 15 months. She explains that by lengthening the depreciation period, a smaller amount of depreciation expense will be recorded in the current year, resulting in a higher net income. She claims that generally accepted accounting principles require estimates like this, so it would not involve doing anything wrong.
Required: Discuss the CFOs proposed solution. In your discussion, consider the following questions. Will the change in depreciation affect net income in the current year in the way that the CFO described? How will it affect net income in the following year? Is the CFO correct when she claims that the change in estimated depreciation is allowed by GAAP? Who relies on the video companys financial statements when making decisions? Why might their decisions be affected by the CFOs proposed solution? Is it possible that their decisions would not be affected? What should you do?
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.Read more
Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.Read more
Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.Read more
Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.Read more
By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.Read more