Question:

S7-5 Ethical Decision Making: A Mini-Case

David is the CEO of AquaGear Enterprises, a seven-year-old manufacturer of boats. After many long months of debate with the company's board of directors, David obtained the board's approval to expand into water ski sales. David firmly believed that AquaGear could generate significant profits in this market, despite recent increases in the cost of skis. A board meeting will be held later in the month for David to present the financial results for the first quarter of ski sales. As AquaGear's corporate controller, you reported to David that the results weren't great. Although sales were better than expected at $165,000 (3,000 units at $55 per unit), the cost of goods sold was $147,500. This left a gross profit $17,500. David knew this amount would not please the board. Desperate to save the ski division, Davis asks you to "take another look at the cost calculations to see if there is any way to reduce the cost of goods sold. I know you accountants have different methods for figuring things out, so maybe you can do your magic now when I need it most." You dig out your summary of inventory purchases for the quarter to recheck your calculations, using the LIFO method that has always been used for the company's inventory of boats.

	Date	Units	Unit Cost	Total
Beginning inventory of water skis	January 1	0	--	--
Purchases	January 15	1,500	$30	$45,000
Purchases	February 18	2,000	45	90,000
Purchases	March 29	2,500	50	125,000

Calculate Cost of Goods Sold using the LIFO method. Does this confirm the statement you made to David about the Gross Profit earned on the water ski sales in the first quarter?Without doing any calculations, is it likely that any alternative inventory costing method will produce a lower Cost of Goods Sold? Explain.Calculate Cost of Goods Sold using the FIFO method. Would use of this method solve David's current dilemma?Is it acceptable within GAAP to report the water skis using one inventory costing method and the boats using a different method?Do you see any problems with using the FIFO numbers for purposes of David's meeting with the board?