University of Alabama at Birmingham Shields Corporation Net Income Case

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Oscar Gamble, Shields Corporation’s Controller is concerned that net income may be lower this year.As a result, he is afraid that upper-level management might recommend cost reductions by laying off accounting staff.The company currently is considering a change in accounting principle related to inventory which would increase earnings.However, this change would be highlighted in the statement of retained earnings as a cumulative effect adjustment and management must prove that the new principle will give a reliable and more relevant financial presentation in the statements.

Instead, he is contemplating increasing estimated useful lives and residual values.That would decrease amortization expense (and increase income).Best of all, this change in estimate will be handled prospectively and not be highlighted in the current and future years’ financial statements.Oscar thinks this approach could save his job and those of his staff.

Answer the question below:

What would you recommend to Oscar Gamble?