Consistent with positive accounting theory,an entity close to breaching their debt covenant will:
A) prefer LIFO method over FIFO method.
B) prefer FIFO method over LIFO method.
C) prefer weighted average method over FIFO method.
D) prefer moving average method over FIFO method.
E) None of the given answers.

Question

Quizplus · Accepted Answer

Positive accounting theory suggests that entities close to breaching debt covenants will prefer accounting methods that increase reported earnings. FIFO typically results in higher earnings than LIFO during periods of rising prices, which can help avoid covenant breaches.

Consistent with Positive Accounting Theory,an Entity Close to Breaching Their