Provision for Obsolete Inventory-Ethical?
The Jones Company is having a very good year with sales running 50% above projections. At the end of the year the CFO decides that this is a good time to provide for possible obsolete inventory and sets up a $15 million reserve account for obsolete inventory. As time permits, next year there will be close examination of inventory to determine inventory that is obsolete.
Required
a. How will the reserve impact current earnings?
b. Next year when the obsolete inventory is identified, how will this impact earnings?
c. Was setting up the reserve ethical? Comment.