ACC305 Wk 4 Ethics Case 9-11 on page 497
ACC305 Wk 4 Ethics Case 9-11 on page 497 fin571
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Date Created: 11/09/15
Ethics Case 911 on page 497 Danville Bottlers is a wholesale beverage company Danville uses the FIFO inventory method to determine the cost of its ending inventory Ending inventory quantities are determined by a physical count For the scal year end June 30 2011 ending inventory was originally determined to be 3265000 However on July 17 2011 John Howard the company39s controller discovered an error in the ending inventory count He determined that the correct ending inventory amount should be 2600000 Danville is a privately owned corporation with signi cant nancing provided by a local bank The bank requires annua audited nancial statements as a condition of the loan By July 17 the auditors had completed their review of the nancial statements which are scheduled to be issued on July 25 They did not discover the inventory error John s rst reaction was to communicate his nding to the auditors and to revise the nancial statements before they are issued However he knows that his and his fellow workers pro tsharing plans are based on annual pretax earnings and that if he revises the statements everyone39s pro tsharing bonus will be signi cantly reduced Required 1 Why will bonuses be negatively affected What is the effect on pretax earnings 2 If the error is not corrected in the current year and is discovered by the auditors during the following year39s audit how will it be reported in the company39s nancial statements 3 Discuss the ethical dilemma John Howard faces Answer Ethics Case 911 Requirement 1 Bonuses will be negatively affected because if the error is corrected a lower ending inventory results in higher cost of goods sold and lower income The effect of the error would be an overstatement of pretax income by 665000 3265000 2600000 Requirement 2 It will be reported as a prior period adjustment to the beginning retained earnings balance for the year beginning July 1 2011 Financial statements for the year ending June 30 2011 will be retrospectively restated to re ect the correct inventory amount cost of goods sold net income and retained earnings Requirement 3 Ethical Dilemma Should John recognize his obligation to disclose the inventory error to Danville shareholders the local bank auditors and taxing authorities or remain quiet enabling him and other company employees to receive originay computed year end bonuses
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