BTN 18-3 Assu CDs, and DVDs. It ume that you are the managerial accountant at In
ID: 2515123 • Letter: B
Question
BTN 18-3 Assu CDs, and DVDs. It ume that you are the managerial accountant at Infostore, a manufacturer of hard drives, ETHICS CHALLENGE C1 C3 s reporting year-end is December 31. The chief financial officer is concerned about ving enough cash to pay the expected income tax bill because of poor cash flow management. On November 15, the purchasing dep of rapid growth of this product beginning in January. To decrease the company's tax liability, the chief financial officer tells you to record the purchase of this inventory as part of supplies and expense it in the current year; this would decrease the company's tax liability by increasing expenses artment purchased excess inventory of CD raw materials in anticipation Required unt should the purchase of CD raw materials be recorded? 2. How should you respond to this request by the chief financial officer?Explanation / Answer
1. As per the accounting principles, only the cost of goods sold can be shown as an expense in the current year. The purchase of rae material which is not yet further processed to make it available for sale cannot be shown as an expense. since, Infostore is inbolved in the business of manufacturinh of CD'S, Harddrives etc...,The purchase of raw material will become inventory to the entity and will be shown as closing stock on the assets side of balancesheet by the year end , since it is not used in the production process.
2. The request of the chief financial officer to expense the stock bought cannot be accepted since it violates the accounying standards and also will not show the true picture of the affairs of the company. Hence, the additional rae material bought should be shown as closing stock in Manufacturing account and should be shown on assets side of balancr sheet for the year end.
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