Question
Merchandiser Corp. has been in business for 40 years and values its cost of goods sold and ending inventory using the LIFO costing method. The
Merchandiser Corp. has been in business for 40 years and values its cost of goods sold and ending inventory using the LIFO costing method. The current year has been particularly unprofitable and Merchandiser Corp. is under significant investor pressure to finish the year with some good news.
Merchandiser Corp's chief financial officer (CFO) has approached the president about a way to substantially increase earnings. She suggest that LIFO stop purchasing inventory the last couple months of the year. Since Merchandiser Corp. uses the LIFO method, this will force the liquidation of inventory cost layers from 20+ years back. Since costs of inventory has increased substantially over this period, Merchandiser will be reporting cost of goods sold at 1/4 current costs.
This will result in a substantial increase in gross profit and "juice up net income," allowing the company to meet inventor expectations. Is this ethical? Explain your answer. Is it ok per GAAP? Is it ok per international accounting standards? Explain your answers. Will savvy investors catch and understand Merchandiser's "trick?"
Please explain in the ethics of this discussion?
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