Cost Flow Methodology. These Are Term Paper

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Thus, if the asset's usefulness will decline consistently after the first year of usage, it is best to use one of the accelerated depreciation methodologies, which will calculate a higher depreciation rate in the first year of usage (when the asset is producing most for the company) and a lower one in the subsequent years, when the asset is less useful for the company. Accelerated methods include the declining balance method and the sum-of-the-years-digits methods.

3. Answering this question first requires a differentiation between accounting (and accounting related activities) and physical reality. For example, cost flow assumption may not always reflect physical flow. In accounting, inventory errors generally correct themselves in the following years, mainly because the accounting methodologies can regulate the values in the following years. But physically, of course, is something different.

4. Basically, GAAP allows various methods of inventory valuation because it seems appropriate for the company to choose the accounting methodologies it sees fit, according to the business it activates in. In this sense, it may be the case that the company activates on markets with fluctuations in the price of goods, perhaps with high inflation.

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In such a situation, the company will need to adapt its inventory valuation methodologies to best fit its interest. It shouldn't be proper to impose a LIFO valuation method when a FIFO is better applicable in a given possibility. GAAP properly decided to give a free hand to companies so that, given a certain situation, they can choose according to their own needs.

5. In my opinion, the essential issue is not whether or not choosing a valuation method to affect the company's bottom line for tax purposes is the main issue here, but whether the method chosen is compliant with the legislation at use. In this sense, as long as the method is legal, there is no point discussing the ethics involved as, in this case, ethics somewhat becomes equivalent to the method's legality. As far as ethics is concerned, the company is free to choose whatever valuation methodology it feels appropriate for its interests. Certainly, this may be considered a business-like approach, where ethics is subordinated to the company's goal, which is maximising its profit, but it is my opinion that this is also the….....

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