Can I please get help with discussing this problem?

In 2010 the Moncrief Company purchased from Jim Lester the right to be the sole distributor in the western states of a product called Zelenex. In payment, Moncrief agreed to pay Lester 20% of the gross profit recognized from the sale of Zelenex in 2011. If Moncrief purchases the additional units at year end under a periodic LIFO inventory system, Moncrief reduces Jim Lester's payment by $40,000 ($210,000 $170,000) and decreases gross profit by $200,000 ($1,050,000 $850,000). The net effect on before-tax income is a decrease of $160,000 ($200,000 $40,000). Since Moncrief does not intend to sell the units until 2014, the only logical reason for purchasing more costly inventory at year-end is profit manipulation. Discuss with your peers the ethical dilemma Moncrief faces in determining whether or not the additional units should be purchased. Should Moncrief exercise its right to purchase inventory at will, resulting in a reduction in net income, or recognize the rights of Jim Lester to receive profit for the sale of his product, shareholders' rights to have their investment appreciate through positive earnings, and government entities' rights to collect tax on economic net income? Why?

I asked as a basic question and the answers I got were not what I was looking for. I need an answer that addresses the specific questions in the discussion. Not a general answer which I noticed were copied directly from Chegg. Here were the answers that have already been given:

Thank you for your help.

Answer 1:

For financial statement reporting purposes, business events are categorized into three types: financing, investing, and operating events. When a business is started financing must be arranged. With the financing the business invests in assets to be used to conduct business operations.

Periodically, owners and creditors want financial information about the business. Owners of a small business may want information very frequently, e.g., monthly, to help manage the business. Creditors may call for information less frequently to evaluate the company's ability to repay a loan.

The basic financial statements and what they report are as follows. The income statement (sometimes referred to as the " P&L" or profit and loss statement) reports revenue and expense events that occurred during the reporting period. Revenues minus expenses equals net income (also referred to as profit or earnings). The balance sheet reports the business's assets, its liabilities, and the owners' equity in the business as of the last day of the reporting period. The statement of cash flows reports cash inflows and cash outflows from financing events, investing events, and operations during the reporting period.

Financial statements reflect the effects of economic events on the business entity. Financing may be obtained from owners, lenders, or both. When owners provide financing, assets and owners' equity on the balance sheet increase. When money is borrowed from lenders, assets and liabilities on the balance sheet increase. Neither of these financing events is reported on the income statement. When a business invests in assets like inventory or equipment, payment is made at time of purchase or the purchase is on credit, with payment due some time later. If assets are bought for cash, the balance sheet will report the asset purchased and show cash lower by the purchase price. If the item is purchased on credit, the balance sheet will report the asset purchased and a liability will have increased by the amount of credit extended by the seller. Neither of these investing events is reported on the income statement. The income statement reports only those events that reflect the measured net income from carrying out the operating activities of the business.

A couple of things make understanding net income difficult. First, it is common to think of money and income as being the same. When it comes to measuring business income, they are not. Think about this. If money is income, you would have to pay income tax on proceeds you got from a banker to buy a car. But you don't. If income is money, wouldn't you get to spend your gross pay instead of your net pay? Well, you don't. Money and income are different concepts. "Money" refers to coin, currency, and checking account balances. Business "income" is a measure of change in a company's assets and liabilities due to a very narrow range of economic events. What that should tell you is that there must be a very important relationship between the income statement and the balance sheet. The next paragraph explains that relationship.

At the heart of business net income measurement is the (accounting) equation "Assets = Liabilities + Owners' equity." However, to understand what is meant by net income, it is better to look at the equation in a different arrangement: Assets - Liabilities = Owners' equity. "Assets minus liabilities" is referred to as "net assets." Net income is the net of two types of events: revenue events and expense events. Revenue events are those events that increase net assets, and thus owners' equity, due to the operations of the business. The primary revenue events are the transfer of product to customers (called sales on the income statement) and the providing of services to customers (called service revenue, e.g., consulting revenue, on the income statement). These revenue events generally increase cash or accounts receivable. Secondary revenue events include return on financial investments (interest revenue, dividend revenue) and gains from sale of operating assets or financial investments. Expense events are those events that decrease net assets, and thus decrease owners' equity, due to the operations of the business. The phrase "due to the operations of the business" is critical to identifying revenue and expense events. For example, the issuance of shares of stock to owners in exchange for cash increases net assets, but is not a revenue event because it is not "due to the operations of the business." Also a cash dividend payment to the owners decreases net assets, but is not considered an expense because it is not an event necessary to the operation of the business.

Answer 2:

Moncrief purchased a product from Jim Lester who is the sole distributor in western states for that product. As Moncrief agreed to pay 20% of gross profit earned on the product to Lester. At the end of the year, Moncrief purchased additional units on LIFO basis.

In LIFO basis, when the prices are rising the goods left at the end are less compared to that of the begining. Which results in decrease of net income. This is method is used to save taxes if any to be paid by the company.

Situation1:

Moncrief should exercise his will to purchase the inventory at the end to keep in mind about the rights-holders who intend to see the profits rising and to pay the taxes to the government.

As Lester is the only distributor and if the product is earning profits, he should pay him in time to make good commitments with the distributor.

At the end, the rights-holders will be satisfied with the profits shown and the company can plan for its long term growth.

Situation 2:

If the company is planning to reduce its taxes and its main intention is to manipulate profits, then it should purchase the additional units at the end which results in less profits and the rights-holders will be disappointed to see low net income for the year end. By which it can save the tax amount to be paid to the government.

Though the cash is received later from the customers, it has to pay the taxes at the end of the year.

And the investors and rights-holders are always interested in the profit figures.