Earnings management is a potential problem for many companies and occurs when the statement of comprehensive income numbers are manipulated by the choice of accounting policies/methods to show a particular income. Sometimes a manager will want to increase the net income to increase the bonus they will receive. In other situations, a manager may want to lower net income to lower the companys taxable amount owing or to encourage the government to impose tariffs and duty on competing companies products.

Questions:

1. Using the concepts of inventories and special journals, explain how a company could show a higher net income in periods of rising inventory prices.

2. Would the above actions be ethical? Is it ever acceptable for a company to change its inventory method?