Question

It's Slow Moving Inventory Topic: Asset Valuation/Write-Downs Jasmine is the first Controller ever hired at a medium-sized technology company. The firm has reacquired computers and other parts and equipment from high-tech firms who filed for bankruptcy or were seriously behind in their monthly payments during a recent two- year downturn in the economy. In addition, the firm has acquired some miscellaneous inventory from competitors experiencing the same misfortune. One of Jasmine's initial goals is to determine how accurately the inventory on the books reflects its fair market value. As she walks with Marcus, the inventory control clerk, through all the equipment and inventory pallets, she notices that numerous parts and machines look dated, and dusty. Marcus informs her that while only about a third of these items are repossessions, most are from overruns or the recession; "many have been sitting on these skids for years." As Jasmine inquires further, it appears that this problem is extensive, and that this inventory moves slowly. When the inventory does sell, it is at a significant discount. Raina, the Sales Manager, indicates that these are really tough times to sell this stuff, especially because most of the "slow movers" are large-ticket items. In fact, Raina feels sorry for her sales staff since they have been forced by the company president to push these items with only 2 percent more in commission. Finally, Jasmine approaches Terry, the Company President, about this problem and asks what he intends for her to do about the dilemma. Terry informs her that he believes that many of these items are salable given appropriate marketing and the right economic conditions. Besides, some of his major customers owe him a few favors. Terry also indicates that now is not the right time for the company to take a hit from inventory revaluation. During the ensuing months, Jasmine did not see much movement from these stacks. She again approached Terry and asked how he would address this issue when the audit came. Terry reiterated his former response regarding product salability and stressed actual sales across all product lines to the auditors. He asked Jasmine not to point out this problem to the auditors and finally said, "just see if they notice it. And if they start nosing around in it, I hope you'll be able to show them that some of these items are turning over." Jasmine interpreted Terry as saying she should help falsify records if it looked like the auditors were discovering the slow movers. Jasmine didn't know what she would do next.

• Identify the potential accounting issue and how it should be handled.

•Identify the potential ethical problem, if one exists.

•Organize and develop your answers in a way to address or solve the problem(s). Use compelling information and/or facts to support tour argument/solution.

Answer 1

The inventory should be valued at fair market value. The fair market value needs to be explained to the auditors. So the issue calls for writing down the slow moving inventory to their fair market value. There is no ethical problem as Jasmine or Terry have to prove to the auditors the fair market value of the concerned inventory. Terry should provide Jasmine evidence of fair market value that can be produced in front of the auditors. Fair market value is usually the market value at which the inventory sells. This will identify the value that needs to be written down. If the economy recovers in future, the inventory fair market value may be written back. Irrespective of whether the inventory is saleable now or later, the inventory needs to be valued at fair market value which will be the market value at which the inventory will sell now. Hence the need for a write-down.