In a review of the annual reports of Pierce Wholesale Company and International Distributors, you note that Pierce Wholesale uses straight-line depreciation and International Distributors uses the declining-balance method.
1. Are these companies violating the generally accepted accounting principle of consistency by using different depreciation methods?
2. If you examined the federal income tax returns of these companies, would you expect the deductions, similar to depreciation taken on their income tax returns, to be the same as the depreciation expenses shown on their financial statements? Why or why not?
3. Assume that these companies are similar in all respects except for their difference in computing depreciation. Which company would you expect to report the lower net income for the year?
4. Who is responsible for determining the depreciation method used by the company for financial accounting purposes?