Question

TIF 5-1 Ethics in Action Margie Johnson is a staff accountant at ToolEx Company, a manufacturer of tools and equip- ment. The company is under pressure from investors to increase earnings, and the president of the company expects the accounting department to "make this happen." Margie's boss, who has been a mentor to her, is concerned that if earnings do not increase, he will be terminated. Shortly after the end of the fiscal year, the company performs a physical count of the inventory. When Margie compares the physical count to the balance in the inventory account, she finds a significant amount of inventory shrinkage. The amount is so large that it will result in a significant drop in earnings this period. Margie's boss asks her not to make the adjusting entry for shrinkage this period. He assures her that they will get caught up" on shrinkage in the next period, after the pressure is off to reach this period's earnings goal. Margie's boss asks her to do this as a personal favor to him. What should Margie do in this situation? Why?

Answer 1

Margie should not agree with his boss.

Inventory shrinkage can occur due to goods getting damaged, theft, clerical error, supplier fraud, etc. ToolEx company should record inventory shrinkage as an expense. As matching principle requires a company to record inventory shrinkage as an expense in the financial year in which it occurs, so that it matches against the revenues for the year. A shrinkage expense account should be recorded. Shrinkage Expense account should be debited and inventory account should be credited.