Question

Earnings Management You are the accountant for the South-Western Division of HiValue Grocery Stores. Late in...

Earnings Management You are the accountant for the South-Western Division of HiValue Grocery Stores. Late in December, Kelly Cholak, the CEO of the division, stops by your office and says, “I have a couple of questions. I recently received a report from the head office on the first 11 months of the year. We are not doing as well as we budgeted, and they are not happy with the gross profit we have earned. But the good news is that I just got off the phone with a big supplier who has excess inventory and could sell us enough of their products to last us three months. Then I remembered we have a perpetual inventory system and that you use that funny LIFO inventory method where you play with such confusing numbers. Will the purchase increase cost of goods sold, because that would only make us look worse? Alternatively I thought we might be able to either switch to the FIFO method OR I thought that we could delay this purchase until after January 1, and we would recognize some of those profits from liquidation of inventory and make ourselves look good for the year’s results. Give these issues some thought and let’s have a drink after work today to discuss them.” Required: From financial reporting objectives of financial reporting, how would you reply to Kelly?

0 0
Add a comment Improve this question
Answer #1
Answer to Kevin Kelly's Questions:
Sr.No. Particulars
1. As explained in the question, company is currently following LIFO inventory method.
In the given case, if the entity makes purchases right now i.e. before year end,
a) it will sell some of the inventory recently bought, or
b) all of the inventory bought in this purchase gets sold.
In both the cases inventory sold will be from latest stock and will not be there in closing stock. This means that inventory bought and sold will have both dr. and cr. impact and therefore it will not affect cost of goods sold.
In case where entity is not able to sell all the units bought in latest purchases, units remaining in stock will be valued at cost or net realisable value whichever is lower, again this will not impact cost of goods sold because all the inventory bought will be reflected in closing stock. This will not increase cost of goods sold.
2. Switching to FIFO method or delaying purchases:
If the entity plans to switch to FIFO method, cost of goods sold will get impacted. Because in the FIFO convention, it is assumed that inventory bought first is sold first and inventory bought latest is in stock. If the cost of goods bought in latest purchase bill is higher and these goods are in stock, this will reduce cost of goods sold. On the contrary, if the cost of goods bought in latest is lower and these goods are in stock, this will increase cost of goods sold.
3. If the entity switches to FIFO method and simulataneously delays the purchase, it will not impact the cost of goods sold. Because the latest bought in goods will come in closing stock after period end and value of inventory will be determined by already purchased goods. This will not affect the cost of goods sold for current period end.
Conclusion: Following LIFO method will not increase cost of goods sold.
On the other hand following FIFO method will either reduce or increase cost of goods sold depending on purchase price of latest lot.
If the entity follows FIFO method and delays the purchase of latest lot it will not impact cost of goods sold.
Add a comment
Know the answer?
Add Answer to:
Earnings Management You are the accountant for the South-Western Division of HiValue Grocery Stores. Late in...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • Sembotix company has several divisions including semiconductor division....

    Sembotix Company has several divisions including a Semiconductor Division that sells semiconductors to both internal and external customers. The company’s X-ray Division uses semiconductors as a component in its final product and is evaluating whether to purchase them from the Semiconductor Division or from an external supplier. The market price for semiconductors is $100 per 100 semiconductors. Dave Bryant is the controller of the X-ray Division, and Howard Hillman is the controller of the Semiconductor Division. The following conversation took place...

  • Sembotix Company has several divisions including a Semiconductor Division that sells semiconductors to both internal and...

    Sembotix Company has several divisions including a Semiconductor Division that sells semiconductors to both internal and external customers. The company’s X-ray Division uses semiconductors as a component in its final product and is evaluating whether to purchase them from the Semiconductor Division or from an external supplier. The market price for semiconductors is $100 per 100 semiconductors. Dave Bryant is the controller of the X-ray Division, and Howard Hillman is the controller of the Semiconductor Division. The following conversation took...

  • 3. The accountant preparing the income statement for Smith, Inc. had some doubts about the appropriate...

    3. The accountant preparing the income statement for Smith, Inc. had some doubts about the appropriate accounting treatment of the five items listed below during the fiscal year ending December 31, 2016. Assume a tax rate of 38 percent. Office equipment purchased June 1, 2016 for $72,000 was incorrectly charged to Supplies Expense at the time of purchase. The office equipment has an estimated six-year service life with no expected salvage value. Smith uses the straight-line method to depreciate office...

  • Question 1 of 1 -/1 View Policies Current Attempt in Progress 2. The accountant preparing the...

    Question 1 of 1 -/1 View Policies Current Attempt in Progress 2. The accountant preparing the income statement for Pharoah, Inc. had some doubts about the appropriate accounting treatment of the seven items listed below during the fiscal year ending December 31, 2020. Assume a tax rate of 20 percent. 1. Office equipment purchased January 1, 2020 for $51,000 was incorrectly charged to Supplies Expense at the time of purchase. The office equipment has an estimated three-year service life with...

  • Ethics and Construction Costs

    You are the accountant for a division of a company that is constructing a building for its own use. It is January 2011, and you are working on closing the books for2010. The CEO of the division stops by your office and says, “I have some question about our building. Although we started the construction at the beginning of Junethis year, we started planning it at the beginning of the previous year. I believe that we can capitalize interest since...

  • TIF 23-1 Ethics in Action ETHICS Sembotix Company has several divisions including a Semiconductor Division that...

    TIF 23-1 Ethics in Action ETHICS Sembotix Company has several divisions including a Semiconductor Division that sells semiconductors to both internal and external customers. The company's X-ray Division uses semiconductors as a component in its final product and is evaluating whether to purchase them from the Semiconductor Division or from an external supplier. The market price for semiconductors is $100 per 100 semiconductors. Dave Bryant is the controller of the X-ray Division, and Howard Hillman is the controller of the...

  • Late one Thursday afternoon, Joy Martin, a veteran audit manager with a regional CPA firm, was...

    Late one Thursday afternoon, Joy Martin, a veteran audit manager with a regional CPA firm, was reviewing documents for a long-time client of the firm, AMT Transport. The year-end audit was scheduled to begin Monday. For three months, the economy had been in a down cycle and the transportation industry was particularly hard hit. As a result, Joy expected AMT's financial results would not be pleasant news to shareholders. However, what Joy saw in the preliminary statements made her sigh...

  • The cloudy afternoon mirrored the mood of the conference of division managers. Claude Meyer, assi...

    The cloudy afternoon mirrored the mood of the conference of division managers. Claude Meyer, assistant to the controller for Hunt Manufacturing, wore one of the gloomy faces that were just emerging from the conference room. “Wow, I knew it was bad, but not that bad,” Claude thought to himself. “I don’t look forward to sharing those numbers with shareholders.” The numbers he discussed with himself were fourth-quarter losses which more than offset the profits of the first three quarters. Everyone...

  • Question 1 You are the senior management accountant for Carvalino Ltd. Carvalino Ltd produces bedroom furniture...

    Question 1 You are the senior management accountant for Carvalino Ltd. Carvalino Ltd produces bedroom furniture made entirely from oak (a type of hardwood). Carvalino Ltd has positioned itself as a manufacturer of high-quality bedroom furniture, which it sells to a range of furniture retailers. Carvalino Ltd is broken down into various divisions, with each division focusing on the production of one particular type of bedroom furniture. Two of these divisions, Divisions A and B. produce wardrobes and beds respectively....

  • Gary Stevens and Mary James are production managers in the Consumer Electronics Division of General Electronics...

    Gary Stevens and Mary James are production managers in the Consumer Electronics Division of General Electronics Company, which has several dozen plants scattered in locations throughout the world. Mary manages the plant located in Des Moines, Iowa, while Gary manages the plant in El Segundo, California. Production managers are paid a salary and get an additional bonus equal to 10% of their base salary if the entire division meets or exceeds its target profits for the year. The bonus is...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
Active Questions
ADVERTISEMENT