CA9-2 (Lower-of-Cost-or-Market) The market value of Lake Corporation’s inventory has declined below its cost. Sheryl Conan, the controller, wants to use the allowance method to write down inventory because it more clearly discloses the decline in market value and does not distort the cost of goods sold. Her supervisor, financial vice president Dick Wright, prefers the direct method to write down inventory because it does not call attention to the decline in market value.
Answer the following questions.
a) What, if any is the ethical issue involved?
b) Is any stakeholder harmed if Dick Wright’s preference is used?
c) What should Sheryl Conan do?
Concepts for Analysis CA 9-2
The ethical issue involved is the accountant is responsible to provide fair and complete financial information. If Sheryl Conan uses the direct method as her supervisors wants her to it will distort the cost of goods sold and hides the decline in market value.
Investors and stockholders in the company would be harmed if Dick Wright’s preference is used. By using the direct method to write down inventory it would be manipulating critical information that would be used to figure out costs of goods sold; which in turn would give wrong calculations to determine selling prices and to establish profit margins. These incorrect calculations would also mislead possible future investors in the company by not clearly showing the decline in market value.
Sheryl Conan should use the allowance method that would reflect that would clearly disclose the decline in market value and not use the other method as her supervisor wants her to. She can explain to him her reasons on why she will not use the direct method and if he does not accept her reason she should go to his supervisor or consider quitting.
CA 10-1 (Acquisition, Improvements, and Sale of Realty)
Tonkawa Company purchased land for use as its corporate headquarters. A small factory that was on the land when it was...