Maria Hernandez the Company Did Book Review

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Accounting journals allow for this information to be tabulated and compiled easily.

2) There are a number of factors for management to consider when deciding whether to switch from LIFO to FIFO. The change in accounting process will have an impact on the immediate year's profits, because it will adjust the cost of inventories. A LIFO reserve will need to be created to account for this change. So management must consider the impact of the transaction on the comparability of their income statements year-over-year. In addition, management must consider if FIFO is a better fit for their organization and the economic circumstances. LIFO, for example, will result in the highest estimate of COGS and the lowest net income during periods of inflation; FIFO will result in the lowest COGS and highest net income (Damodar, n.d.)

3) As an investor evaluating an investment in a company, there are a number of ratios with which I would be concerned, depending on the nature of the investments. As a debt investor, I would be most concerned with liquidity and solvency measures such as the current ratio, the debt-to-equity ratio and the interest coverage. I would also be concerned with these measures as an equity investor, along with several others. One is the return on equity and the return on investment.

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The price/earnings ratio is important for buying equity at the right price level. Also important is to analyze trends in the company's margins, and the company's efficiency ratios (asset turnover, inventory, turnover, receivables turnover).

4) Current costs are those that are due or paid in the coming year. They are short-term costs. Companies total their known and expected current costs when making cash-flow estimates and decisions for the coming year. Opportunity costs are the cost of not choosing to do something. That is, the benefits/costs that an opportunity could have generated, but will not because the company chose a different action or decision. Opportunity costs contribute to the decision making process when decisions are mutually exclusive -- then the opportunity cost is a way for management to weigh different options against each other, to choose the best one. Sunk costs are costs that have already been realized. The money is already spent. Sunk costs should not impact on decision-making. The money is already gone -- no matter what the company decides it cannot get that money back. Therefore, sunk costs are irrelevant in rational decision making. For many companies, however, sunk costs are still incorporated in the decision-making process.

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