Final answer:
Maxim, Inc.'s switch from units-of-production to straight-line depreciation indicates a change in how the company allocates the cost of an asset over its useful life. The straight-line method results in consistent, annual depreciation expenses, while the units-of-production method varies with asset use. This accounting change impacts financial statements and must be disclosed.
Step-by-step explanation:
When Maxim, Inc. changed its depreciation method from units-of-production to straight-line, the company is modifying the way it allocates the cost of an asset over its useful life. The straight-line depreciation method spreads the cost evenly over the life of the asset, resulting in a fixed annual depreciation expense. In contrast, the units-of-production method ties the depreciation expense to the actual usage of the asset, which can result in variable depreciation expense each year based on the number of units produced.
The change in depreciation method by Maxim, Inc., reflects a change in accounting estimates and will affect the company's financial statements, particularly the balance sheet and income statement. This is often done to better align the depreciation expense with the economic benefits received from the asset or for tax purposes.
Any change in the depreciation method needs to be accounted for prospectively, meaning that the new method is applied to the asset's remaining book value as of the date of change and for all future periods. The company must also disclose the reasons for the change in its financial statements, along with the effects on the current and future financial results.