Question

Amy Martin is a student who plans to attend approximately four professional events a year at her college. Each event necessitates a financial outlay of $100 to $200 for a new suit and accessories. After incurring a major hit to her savings for the first event, Amy developed a different approach. She buys the suit on credit the week before the event, wears it to the event, and returns it the next week to the store for a full refund on her charge card.

1. Comment on the ethics exhibited by Amy and possible consequences of her actions.

2. How does the merchandising company account for the suits that Amy returns?

Answer 1

1) Ethics are moral principles that govern what is right or wrong; honest or dishonest; and fair or unfair. Amy Martin, purchasing a suit to wear to a significant event and afterwards returning it to the store for credit would not be considered an illegal action, however is an unethical practice that has economic consequences. The rretailers lose revenue when the goods are returned, as they can no longer resell the item as new; therefore, having to sell the item at a large discount. Thus to the compensate for the loss the store will either increase prices on products or “eat the losses and generate less profit”. If everyone follows this practice then it will have a big impact on the economy.

2) Majority of the larger retailers choose the perpetual inventory system as businesses usually carry products in large quantities, performing a physical count can be time consuming and difficult. On the general ledger, on the return of Amy’s suit, it will debit the Sales Returns and Allowances account, and credit the Accounts Receivable account. The other entry will include a debit to the Merchandise Inventory account, and a credit to the Cost of Goods Sold Account.