Reference no: EM133043905
Question 1 - Susan Hopkins recently went to work for RJ Enterprises as the accounting manager. At the end of the year, Bill Harrison, the CEO, called Susan into his office for a meeting. Mr. Harrison explained to Susan that RJ Enterprises was in the midst of obtaining a substantial cash investment from a major investor. Mr. Harrison said he was concerned that the investor would decide not to invest in RJ Enterprises when it saw the current year's results of operations. Mr. Harrison then asked Susan to revise the current year's financial statements by increasing the value of the ending inventory in order to decrease cost of goods sold and increase net income. Mr. Harrison tried to reassure Susan by explaining that the company is undertaking a new advertising campaign that will result in a significant improvement in the company's income in the following year. Susan is concerned about the future of her job, as well as others within the company, if the company does not receive the investment of cash.
What would you do if you were in Susan's position?
If Susan increases the value of the current year's ending inventory, what will be the effect on the following year's net income?
Question 2 - Pacific Equipment, which sells industrial handling equipment, values its inventory using LIFO. During the current year, Pacific Equipment has experienced a significant increase in the cost of its inventory items. Although the net income for the current year has been fairly good, Lynne Jamison, the company president, wishes it was higher because the company has been considering borrowing money to purchase a new building. Mrs. Jamison has heard that a company's choice of inventory valuation method can affect the company's net income. Mrs. Jamison has asked the controller, Lisa Adams, to explore the possibility of changing the company's inventory valuation method.
If you were in Lisa's position, how would you respond to Mrs. Jamison? Address potential ethical implications and applicable accounting principles in your answer.