As conotroller of a widely held public company, you are concerned with making th
ID: 2434647 • Letter: A
Question
As conotroller of a widely held public company, you are concerned with making the best decisions for the stockholders. At the end of its first year of operations, you are faced with the choice of method to value inventory. Specific identification is out of the question because the company sells a large quantity of diversified products. You are trying to decide between FIFO and LIFO. Inventory costs have increased 33% over the year. The chief executive officer has instructed you to do whatever it takes in all areas to report the highest income possible.1.Which method is in the best interest of the stockholders? Explain your answer.
2. Why is reporting the highest income not always the best apporach for the stockholders?
Explanation / Answer
1.Which method is in the best interest of the stockholders? Explain your answer. For reporting higher Income as desired by CEO, we have to use FIFO method, as the cost of goods has increased by 33%. In the best interest of stockholders is to use LIFO method, as it will give higher cost of goods sold. This will result in less net income and will reduce income tax expense. The ending inventory will be at less price than the market price, therefore will cover the fulture loss of price reduction, if any. 2. Why is reporting the highest income not always the best apporach for the stockholders? Reporting higher income is not always good for the stockholders, as it leads to shown the financial statements better, than what they actually are. It is called window dressing. This will lead to losses in future. The stockholders will be facing huge losses in future, as they will be making their future calculations based on the present figures, which are not true.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.