Question

the financial w 000 from April to April 16. It was or recovered from customers y reached an agreement with the insurance company that she average of the gross profit rates for the preceden so) and 2014 showed the following data. 2014 Net sales S600.000 Cost of goods purchased 404.000 Beginning inventory 60,000 40.000 Ending inventory 80,000 cost of $17,000 was salvaged from the fire. 2013 5480,000 350.000 60,000 w with a es divided into groups, answer the following the balances in (1) Sales Revenue and (2) Purchases at April 10. the average gross profit rate for the years 2013 and 2014. (Hint: Find the gross prom ach year and divide the sum by 2.) in the inventory loss as a result of the fire, using the gross profit method N ermine the la communication Activity you are the controller of Small Toys Inc. Marta Johns, the president, recently mentioned but she found an error in the 2014 financial statements which she believes has corrected se determined, in discussions with the Purchasing Department, that 2014 ending inventory stated by 1 million. Marta says that the 2015 ending inventory is correct. Thus, she that 2015 income is correct. Marta says to you, "What happened has happened theres point in worrying about it anymore." 2011 Aeros onclude that Marta is incorrect. Write a brief tactful memo to Marta, clarifying the situation. Ethics Case 57 RJ. Graziano Wholesale Corp. uses the LIFO method of inventory costing. In the current aprofitat R. J. Graziano is running unusually high. The corporate tax rate is also high this year, but So scheduled to decline significantly next year. In an effort to lower the current year's net income and e advantage of the changing income tax rate, the president of R.J. Graziano Wholesale instructs plant accountant to recommend to the purchasing department a large purchase of inventory for Wir 3 days before the end of the year. The price of the inventory to be purchased has doubled dur the year, and the purchase will represent a major portion of the ending inventory value. Restrictions a) What is the effect of this transaction on this year's and next year's income statement and income tax expense? Why? WIR J. Graziano Wholesale had been using the FIFO method of inventory costing, would the president give the same directive? (c) Should the plant accountant order the inventory purchase to lower income? What are the ethical implications of this order? All About You BYP6-8 Some of the largest business frauds ever perpetrated have involved the misstatement of inventory. Two chies were at Leslie Fay and McKesson Corporation. Instructions There is conside: le information regarding inventory frauds available on the Internet. Search for information abre of the two cases mentioned above, or inventory fraud at any other company and prepare a bit explanation of the nature of the inventory fraud.

Answer 1

Answer a)

Companies following LIFO method of Inventory Valuation , with an economic environment , where tax rates are expected to be reduced from the coming year, it has been observed that the Companies , following LIFO , go for extensive purchases , especially, at the end of the year.

The purpose of this high purchases is maintaining the Cost of Good sold at higher rate and keeping the margins low and ultimately , the Taxable Income is also low.

LIFO speaks about the fact that the situation , when the prices are increasing and high volume of purchases is made by the Company, it is going to reflect on Cost of Goods sold at higher rate and Inventory valuation at a lower rate. Finally, the taxable revenue is reduced and thus, low income tax is payable.

In the given case, the effect of high value purchases at the year end is going to reduce the Taxable revenue and Company is planning to have less tax payable at the year end. The reasons have been discussed above ,in detail. It is a Common practice with the Companies working on LIFO and with the tendency to go for high purchases at the year end.

Answer b)

No, had the method adopted be FIFO , it would have reverse impact. The Cost of goods sold will be low in FIFO , when the prices are almost doubled at the year end and it will also create inventory value at high and resulting into higher taxable income and higher income tax. Hence, was FIFO in place, the president would not have instructed as above.

Answer c)

Plant Accountant , who is ultimately reporting to the President , has no option but to follow the Instructions. However, it gives scope for the auditors to find out , lowering the inventory valuation by these unethical means. Auditor might enquire into abnormal high volume of purchases at the year end.

Accountant will have to answer the Auditor , if asked .

The ethical implications are on the fair business practices and subject to objection by Auditor.