Question

What would you do if you were in Susan's position?

If Susan increases the value of the current years ending inventory, what will be the effect on the following years net income?

Case 1. Susan Hopkins recently went to work for RJ Enterprises as the accounting manager. At the end of the year, Bill Harrison, the CEO, called Susan into his office for a meeting. Mr. Harrison explained to Susan that RJ Enterprises was in the midst of obtaining a substantial cash investment from a major investor. Mr. Harrison said he was concerned that the investor would decide not to invest in RJ Enterprises when it saw the current year's results of operations. Mr. Harrison then asked Susan to revise the current year's financial statements by increasing the value of the ending inventory in order to decrease cost of goods sold and increase net income. Mr. Harrison tried to reassure Susan by explaining that the company is undertaking a new advertising campaign that will result in a significant improvement in the company's income in the following year. Susan is concerned about the future of her job, as well as others within the company, if the company does not receive the investment of cash.

Answer 1

• If the value of current year ending inventory is increased then it will affect the financial position as well as financial performance of RJ Enterprises. Cost of goods sold will be reduced that will result in better business operation and good position of business in terms of net worth and all if value of closing inventory increased.
• But if it is increased just only to get investment of cash from investors without any financial effect then it will affect the business in long run.
• If I were in Susan's position then I will not change the inventory value to defraud the stakeholders for investment. I will inform the fact to all those investors that we have a good advertising campaign that will result in significant improvement in the company's income in the following year.