EXERCISE 9.5

Evaluation of Disclosures in Annual Reports

A recent annual report ofLowe'sindicates that property is capitalized at cost if it is expected to yield future benefits and has an original useful life that exceeds one year. Cost includes all applicable expenditures to deliver and install the property. Depreciation is provided over the estimated useful lives of its depreciable assets by the straight-line method. In explaining the details underlying the company's reported income tax expense, it is clear that the company uses accelerated write-off of asset cost for income tax purposes.

1. Is the company violating the accounting principle of consistency by using different depreciation methods in its financial statements than in its income tax returns? Explain.
2. Why do you think that the company uses accelerated depreciation methods in its income tax returns?
3. Would the use of accelerated depreciation in the financial statements be more conservative or less conservative than the current practice of using the straight-line method? Explain.