PROBLEM 2-24 Ethics and the Manager [LO2-3] M. K. Gallant is president of Kranbr
ID: 2406527 • Letter: P
Question
PROBLEM 2-24 Ethics and the Manager [LO2-3] M. K. Gallant is president of Kranbrack Corporation, a company whose stock is traded on a national exchange. In a meeting with investment analysts at the beginning of the year, Gallant had predicted that the company's earnings would grow by 20% this year. Unfortunately, sales have been less than expected for the year, and Gallant concluded within two weeks of the end of the fiscal year that it would be impossible to ultimatcly report an increasc in carnings as large as predicted unless some drastic action was taken. Accordingly, Gallant has ordered that wherever possible, expenditures should be postponed to the new year-including canceling or postponing orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-year advertising and travel. Additionally. Gallant ordered the company's controller to carefully scrutinize all costs that are cur- rently classified as period costs and reclassify as many as possible as product costs. The company is expected to have substantial inventories at the end of the year. Required: . Why would reclassifying period costs as product costs increase this period's reported carnings? 2. Do you believe Gallant's actions are cthical? Why or why not?Explanation / Answer
1) Answer: Period costs are expensed in the period in which they occur and not necessarily to be part of the process of manufacturing. Product cost are expensed in the period as when the associated units of product are sold and includes direct labor, direct material and overhead expenses in manufacturing of company's product. When few units remain unsold at the period end, the costs of such unsold units are treated as assets. Hence by reclassifying period costs as product costs, the firm will be able to carry certain costs forward in inventories that would have been categorised as current expenses
2) Answer: According to me Gallant's action are not ethical. The company is manipulating their financial books in an effort to reach goals. Such reclassifications are violation of the principle of consistency in financial reporting and are a clear attempt to mislead financial reports readers. These actions are not fair to suppliers as they will not be receiving the expecting income because Kranback is trying to manipulate costs
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