(LCNRV) The net realizable value of Lake Corporation\'s inventory has declinedbe
ID: 2567688 • Letter: #
Question
(LCNRV) The net realizable value of Lake Corporation's inventory has declinedbelow its cost. Allyn Conan, the controller, wants to use the loss method to write down inventorybecause it more clearly discloses the decline in the net realizable value and does not distort thecost of goods sold. His supervisor, financial vice president Bill Ortiz, prefers the cost-of-goods-sold method to write down inventory because it does not call attention to the decline in netrealizable value.
Answer the following questions.
(a) What, if any, is the ethical issue involved?
(b) Is any stakeholder harmed if Bill Ortiz's preference is used?
(c) What should Allyn Conan do?
Explanation / Answer
a. The ethical issue involved here is that the use of cost-of-goods-sold method to write down inventory (as suggested by Bill Ortiz) is against the principle and concept of materiality. This method will artificially hide the loss on cost of goods sold account and income statement of Lake Corporation will not reflect this loss.
b. Yes, shareholders and investors will be harmed if Bill Ortiz's preference is used. This is because Bill’s method wrongfully inflates the profitability of Lake Corporation. Thus investors and shareholders are made to believe that Lake’s profits are strong and so they are wrongfully lured to make further investments in Lake Corporation by buying their shares in the secondary market.
c. Allyn Conan should refuse to adopt the method as suggested by Bill Ortiz. Conan should explain to Ortiz the ramifications of using the cost-of-goods-sold method to write down inventory. Conan should also stress on the need to maintain integrity while preparing books of accounts.
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