Pierce Ice Cream Company operates several ice cream shops across the United States. The company has plans to expand the number of shops during the coming year. This planned expansion will require a large bank loan. During the past 5 years, some periods
were more profitable than others, and the President of Pierce has suggested to the company accountant that the depreciation and inventory valuation methods should be changed frequently. This change would allow the company to create the appearance that earnings were very consistent over the years. Discuss the merits of the President's suggestion regarding the financial statements.
The President's attempt to streamline earnings by frequently changing depreciation and inventory methods is a violation of the accounting conventions of comparability and consistency. Once the selection of accounting methods for such areas as depreciation and inventory are made, the company should continue to apply these methods from one period to the next. To vacillate between different methods greatly diminishes the usefulness of the financial statements in providing meaningful information. The true picture of somewhat erratic earnings is hidden by the President's suggestion to present operations in a more favorable light in order to receive a loan from the bank.
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