Ethics and the Valuation of Inventory Your company manufactures a line of processed snack foods using a soybean base with a low fat content. The line was very popular until recent publicity that emphasized that the product is very high in salt and contains numerous chemical preservatives. Now, you have inventory on hand that will be hard to sell. The inventory originally cost $3,500,000. Its wholesale selling price prior to the publicity had been $7,000,000. The sales division has presented the following alternative proposals to the executive committee of which you are a member:

Proposal 1; Offer the product at deep discounts to the regular customers. If the discount is large enough, all the inventory will probably be sold. The expected selling price for the total inventory under these conditions is estimated to be about $2,000,000.

Proposal 2: Market the product in third-world counties as a nutritious soybean-based food. Marketing costs will probably be $1,000,000, but the entire inventory could be sold at regular list price of $7,000,000. Nutrition disclosure requirements are virtually nonexistent in most of these countries.

As a member of the executive committee, address each of the following issues:

a. Do any accounting entries need to be made to reflect the inventory problems?

b. Which proposal would you favor? Would you suggest any other alternatives?

c. What type of financial disclosure would you expect your company to make if financial statements were prepared prior to the selection of an alternative for disposing of the inventory?