Question
Earnings Management You are the accountant for the South-Western Division of HiValue Grocery Stores. Late in December, Kelly Cholak, the CEO of the division, stops
Earnings Management You are the accountant for the South-Western Division of HiValue Grocery Stores. Late in December, Kelly Cholak, the CEO of the division, stops by your office and says, I have a couple of questions. I recently received a report from the head office on the first 11 months of the year. We are not doing as well as we budgeted, and they are not happy with the gross profit we have earned. But the good news is that I just got off the phone with a big supplier who has excess inventory and could sell us enough of their products to last us three months. Then I remembered we have a perpetual inventory system and that you use that funny LIFO inventory method where you play with such confusing numbers. Will the purchase increase cost of goods sold, because that would only make us look worse? Alternatively I thought we might be able to either switch to the FIFO method OR I thought that we could delay this purchase until after January 1, and we would recognize some of those profits from liquidation of inventory and make ourselves look good for the years results. Give these issues some thought and lets have a drink after work today to discuss them. Required: From financial reporting objectives of financial reporting, how would you reply to Kelly?
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