Issue: Reed Kohler is in his final year of employment as controller for Quality Sales Corporation; he hopes to retire next year. As a member of top management, Kohler participates in an attractive company bonus plan. The overall size of the bonus is a function of the firm’s net income before bonus and income taxes—the larger the net income, the larger the bonus. Due to a slowdown in the economy, Quality Sales Corporation has encountered difficulties in managing its cash flow. To improve its cash flow by reducing cash payments for income taxes, the firm’s auditors have recommended that the company change its inventory costing method from FIFO to LIFO. This change would cause a significant increase in the cost of goods sold for the year. Kohler believes the firm should not switch to LIFO this year because its inventory quantities are too large. He believes that the firm should work to reduce its inventory quantities and then switch to LIFO (the switch could be made in a year or two). After expressing this opinion to the firm’s treasurer, Kohler is stunned when the treasurer replies: “Reed, I can’t believe that after all these years with the firm, you put your personal interests ahead of the firm’s interests.” Questions to be Answered: Explain why Kohler may be viewed as holding a position that favors his personal interests. What can Kohler do to increase his credibility when the possible change to LIFO is discussed at a meeting of the firm’s top management next week?
#6
Issue: Reed Kohler is in his final year of employment as controller for Quality Sales Corporation; he hopes to retire next year. As a member of top management, Kohler participates in an attractive company bonus plan. The overall size of the bonus is a function of the firm’s net income before bonus and income taxes—the larger the net income, the larger the bonus.
Due to a slowdown in the economy, Quality Sales Corporation has encountered difficulties in managing its
Questions to be Answered:
- Explain why Kohler may be viewed as holding a position that favors his personal interests.
- What can Kohler do to increase his credibility when the possible change to LIFO is discussed at a meeting of the firm’s top management next week?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
