Question #32
Reading: Reading 12 Evaluating Quality of Financial Reports
PDF File: Reading 12 Evaluating Quality of Financial Reports.pdf
Page: 24
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
Which of the following items is least likely to involve the use of subjective measurement estimates by management?
Answer Choices:
A. Use of straight-line depreciation method to depreciate tangible assets
B. Use of FIFO (first in-first out) to cost inventories
C. Use of criteria to determine treatment as an extraordinary item
Explanation
The use of criteria to determine treatment as an extraordinary item (i.e. Is the item within
management's discretion? Is the event likely to recur in the foreseeable future?) does not
involve numerical and subjective estimates per se. It is more a test of qualitative factors to
determine the proper classification. Contrast this to FIFO, which is clearly a numerical
estimate since an alternative of using LIFO (last in-first out) is possible and this will result
in a different reported amount than FIFO. The same argument can be made for the use of
the straight-line method since an alternative of using the declining-balance method is
possible to depreciate tangible assets.