Question

Richmond, Inc. operates 44 shopping malls. Two years ago, the Richmond Board of Directors decided to renovate the store to attract more top-class customers.

Before implementing these plans, Linda Pearlman, assistant financial manager, was asked to oversee financial reporting for the pilot shop, and it was known that she and other executives receive bonuses from the company's sales growth and profitability.

As she filled in the financial report, she discovers that there are inventory items that have been out of fashion, and that these items should be discounted for sale or returned to the manufacturer. She consulted this situation with her management colleagues, who agreed that it was a good idea not to list these products as obsolete items. If they do, they will have a negative impact on their financial performance and certainly affect their bonuses.

Do you think that what Pearlman would do without reporting the product as a falling product? Are there ethical issues in accounting? What should she do?

Answer 1

Pearl man would classify the inventory as goods held for sale at their acquisition value rather than reporting as per GAAP principles. This will help her achieve the intended profits as higher value of finished goods inventory will result in a higher net profit. It is certainly not ethical on her part to report higher inventory figures in a bid to show inflated fictitious profits to earn a bonus.She must report inventory that has lost its economic value must be reported at lower of cost or net realisable value as per prudence concept in accounting. The idea is that the inventory must reflect the most realistic realisable value so as to not over estimate profits and account for anticipated losses.