Question

Assume that you are the managerial accountant at Infostore, a manufacturer of hard drives, CDs, and DVD.. Its reporting year-end is December 31. The chief financial officer is concerned about having enough cash to pay the expected income tax bill because of poor cash flow management. On November 15, the purchasing department purchased excess inventory of CD raw materials in anticipation of the rapid growth of this product beginning in January. To decrease the company's tax liability, the chief financial officer tells you to record the purchase of this inventory as part of supplies and expense it in the current year; this would decrease the company's tax liability by increasing expenses. Required 1. In which account should the purchase of CD raw materials be recorded? 2. How should you respond to this request by the chief financial officer?

Answer 1

1) The purchase of CD material should be recorded in raw material inventory account ( Raw material inventory account contains all costs with respect to all component parts that form the part of the inventory that has not yet been used in production of  Work in progress and Finished goods ). In balance sheet Such Inventory  should be included in the stock of company containing cost of work-in-process and finished goods inventory that has remained unsold , hence this will become the asset of company.

2) In the view of Accounting & taxation it is not correct to   record  the purchase of CD raw material as part of supplies and then treating it as an expense for current year . The request of Chief Financial officer is inaccurate treatment and not viable . In accounting we Initially record all types of the raw material into the inventory asset account , this is done by debiting it  to the raw materials inventory account and a crediting the same  to the accounts payable account . Thus if we follow the treatment as given by the CFO then Stock would not be  considered as an asset of company and the same will be  treated as an expense. Hence this all will affect  the financial position of company, & will lead to in correct financial position & statements of the company , Ultimately this will have a bearing on the taxation aspects of the company.