Accounting 205

Case 2. Suppose you own Campbell Appliance. The store’s summarized financial statements for 2008, the most recent year, follow:

Assume that you need to double net income. To accomplish your goal, it will be very difficult to raise the prices you charge because there is a Best Buy nearby. Also, you have little control over your cost of goods sold because the appliance manufacturers set the price you must pay.

Identify several strategies for doubling net income. (Challenge)

Different accounting methods have different effects on net income. Some methods are more conservative than others because they tend to produce a lower net income in the current period. For example, suppose that two companies have similar operations, but one uses FIFO for inventory costing and the straight-line (SL) method for computing depreciation, whereas the other uses LIFO for inventory costing and the double-declining-balance (DDB) method for computing depreciation. The income statements of the two companies might appear as follows:

| FIFO & SL | | LIFO & DDB |

Net sales | $925,000 | | $925,000 |

Goods available for sale | $400,000 | | $400,000 |

Less ending inventory | 60,000 | | 50,000 |

Cost of goods sold | $340,000 | | $350,000 |

Gross margin | $585,000 | | $575,000 |

Less depreciation expense | $40,000 | | $80,000 |

Less other expenses | 170,000 | | 170,000 |

Total operating expenses | $210,000 | | $250,000 |

Income from continuing operations before income taxes | $375,000 | | $325,000 |

The income from continuing operations before income taxes (operating income) for the firm that uses LIFO and DDB is lower because in periods of rising prices, the LIFO inventory costing method produces higher cost of goods sold, and in the early years of an asset’s useful life, accelerated depreciation yields a higher depreciation expense. The result is lower operating income. However, future operating income should be higher.

Although the choice of...