Grainiacs, Inc. is a diversified commodity merchandising company located in the upper mid-west with fiscal operations conducted on a calendar-year basis. The company primarily buys and sells corn and soybeans and operates multiple storage facilities in several states. Each storage location is individually registered as a Licensed Federal Warehouse with US Department of Agriculture. This licensing allows each facility to legally sell all or a portion its physical grain inventory for cash, effectively shifting ownership of those particular stocks to the purchasing company while maintaining physical control of the assets (hence becoming consigned inventory belonging to the purchaser). Each sale is consummated at arms-length. That is, the purchaser gives Grainiacs cash equal to the value of the grain purchased and Grainiacs in-turn gives the purchaser a Federal Warehouse Receipt, a federally issued negotiable instrument representing ownership of the inventory. At this point, Grainiacs will record as sale of the inventory, and will no longer formally recognize the inventory on its financial statements, but is required by law to maintain a report showing owned and non-owned inventory located at the facility. In addition, the facility cannot allow total physical stocks to fall below the amount owned by the purchaser until it is shipped to the purchaser. Once the purchaser receives all the grain, the Warehouse Receipt is cancelled and returned to Grainiacs. The entire transaction is supported by a formal written sales/purchase contract outlining all specifics of the trade including quality and volume amounts and pricing conditions.

At the beginning of the year, the Grainiacs senior executive responsible for storage facility operations was assigned the goal of reducing the carrying value of inventory by 20%. As an incentive, the goal was tied to a performance bonus of 15% of the executives