Explain underlying GAAP for inventory; evaluate management decisions
Response to the following problem:
Determine whether each of the following actions in buying, selling, and accounting for inventories is ethical or unethical. Give your reason for each answer.
1. LLW Corporation deliberately overstated purchases to produce a high figure for cost of goods sold (low amount of net income). The real reason was to decrease the company's income tax payments to the government.
2. Lacey Pharmaceuticals purchased a large amount of inventory shortly before year-end to increase the LIFO cost of goods sold and decrease reported income for the year.
3. Johanson Sales, Inc., delayed the purchase of inventory until after December 31, 2014, to keep 2014's cost of goods sold from growing too large. The delay in purchasing inventory helped net income of 2014 to reach the level of profit demanded by the company's investors.
4. Davidson Sales Company deliberately overstated ending inventory in order to report higher profits (net income).
In applying the lower-of-cost-or-market rule to inventories, Coastal Coffee Company recorded an excessively low value for its ending inventory (below both cost and market). This allowed the company to pay less income tax for the year.