(Considering comparability, LO 3) Thoburn Ltd. (Thoburn) and Nitro Inc. (Nitro)

are two companies in the same industry. The net incomes for the year ended October 31, 2005 for the companies are shown below:

Upon reviewing the financial statements you discover that the two companies use identical accounting policies except for inventory and amortization of capital assets.
Thoburn uses a method for accounting for inventory called FIFO, while Nitro uses a method called average cost (these methods will be discussed in Chapter 8). Also, Thoburn uses a method called straight-line amortization for amortizing its capital assets while Nitro uses a method called accelerated amortization (these methods of accounting for amortization will be discussed in Chapter 9).
Had Thoburn used average cost for accounting for inventory, its net income would have been $30,000 lower than it reported in its financial statements. Had Nitro used FIFO instead of average cost for accounting for inventory, its net income would have been $30,000 higher than it reported in its financial statements. Had Thoburn used accelerated amortization instead of straight-line amortization, its net income would have been $20,000 lower than it reported in its financial statements. Had Nitro used straight-line amortization instead of accelerated amortization, its net income would have been $20,000 higher than it reported in its financial statements.
Required:

a. Compute net income for Thoburn and Nitro under the following circumstances:

b. Which company performed better during the year ended October 31, 2005? Explain.

c. Why do you think the managers of Thoburn and Nitro selected the accounting policies they did? Explain.

d. What are the implications of having more than one acceptable accounting method under GAAP on a user’s ability to use the financial statements?

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Thoburn Ltd. Nitro Inc. Net income for the year ended October 31, 2005 $125,000 $ 75,000