Question

Ethics Question (30 pts.: 20 pts. for content; 10 pts. for communication)

L Co. has not been very profitable for the past three years. Additionally, a recently-ousted manager purchased a substantial quantity of inventory earlier this year…inventory whose customer desirability has waned to some extent. As such, the inventory value has declined below its cost and two methods of handling the write-down are being discussed: showing the amount of the write-down ($3,000,000) as a line item loss on the income statement and showing the loss as part of cost of goods sold. Both methods are GAAP.

a.   What is the ethical accounting issue in this situation?

b.   Considering the qualitative characteristics of accounting as well as basic accounting concepts, discuss pros and cons of using (1) the loss method and (2) the CGS method.

c.   What other information might be useful in making the decision as to how the loss will be recognized on the income statement?

d.   What method would you choose and why?

Answer 1

ANSWER :-

Here the both methods are GAAP.

(a) To accounting issue in this circumstance is to uncover the loss of stock as detail misfortune in salary explanation or to incorporate the misfortune in expense of products sold.

(b) Favorable position of bookkeeping stock discount under misfortune strategy its effect on pay proclamation as a different detail and it is obvious on face of the salary articulation this technique is utilized when the privilege off is considerably higher sum . the stock discount shows up in expense of merchandise sold to adjust the discount which appeared as a detail in pay proclamation

By and large representing stock discount is accounted in expense of merchandise sold under this strategy misfortune on special of stock is incorporated into expense of products sold which will expand the expense of merchandise sold

The drawback of utilizing cost of products sold strategy is that misfortune can't be followed independently from salary explanation

(c)

The organization has not in benefits from the most recent three years and colossal measure of misfortune from the declined interest and the expense of stock .This occasion ought to know by different investors and immense misfortune from stock is required for the basic leadership

(d)

Here we need to choose a method and distinguish why

The good accounting is finish discount the misfortune as a result of the given conditions and estimation of the sum included measure of misfortune is higher it is required for a separate reasonable exposure in the accounting explanations.

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