Asked by Katherine Tortorella on Jul 13, 2024
Verified
The company's inventory manager receives compensation that includes a bonus based on gross profit.You discover that the inventory manager has knowingly overstated ending inventory by $2 million.What effect does this error have on the financial statements of the company and specifically gross profit? Why would the manager knowingly overstate ending inventory? Would this be considered an ethics violation?
Gross Profit
The difference between sales and the cost of goods sold, indicating the basic profitability of a company's core business activities.
Ending Inventory
The value of goods available for sale at the end of the accounting period, calculated by adding purchases to beginning inventory and subtracting cost of goods sold.
Ethics Violation
An action that goes against moral principles or professional standards, often resulting in disciplinary action.
- Analyze the effect of inventory valuation methods on financial statements and tax implications.
- Understand the ethical considerations in inventory management and reporting.
Verified Answer
SR
shanai ramirezJul 14, 2024
Final Answer :
By overstating ending inventory,the cost of goods sold is understated,causing the gross profit to be overstated and net income to be overstated.By overstating the gross profit,this would increase the manager's bonus.The assets and equity would also be overstated.Since the manager's bonus is based on gross profit,the error would result in a larger bonus since gross profit would be overstated.Yes,this would be considered an ethics violation since the manager intentionally overstated ending inventory and the financial statements would contain errors that could affect decisions made by the users of the financial statements.
Learning Objectives
- Analyze the effect of inventory valuation methods on financial statements and tax implications.
- Understand the ethical considerations in inventory management and reporting.