Stark Industries sells semiconductors that are used in games and small toys. The company has been extremely successful in recent years, recording an increase in earnings each of the past six quarters. At the end of the current quarter, Pepper Pots, the company's staff accountant, calculated the ending inventory for the semiconductors and was surprised to find that the quantity of the Stark Hud 2020 model had not changed during the quarter. Pepper confirmed her calculation with the inventory control manager, who indicated that the sales of the Stark Hud 2020 had stopped when the Stark Hud 2024 semiconductor was released early in the quarter. Pepper researched the issue further and found that the Stark Hud 2024 semiconductor had the same applications as the Stark Hud 2020, but has more computing power and lower cost that the 2020. Pepper emailed this information to Tony Stark, the chief financial officer, and recommended that the company apply the lower-of-cost-or-market (LCM) method to the Stark Hud 2020 semiconductors in inventory. Later than day, Tony emailed Pepper back instructing her not to apply the LCM method to the 2020 inventory because "the company is under considerable pressure to maintain its track record of earnings growth, and LCM adjustment would result in a significant decline in earnings this quarter." Reluctantly, Pepper followed Tony's instructions. Consider the decision not to apply the LCM method in the current quarter: 1) Who benefits from this decision? 2) Who is harmed by this decision? 3) Are Pepper and Tony acting in an ethical manner? Explain.
Stark Industries sells semiconductors that are used in games and small toys. The company has been extremely successful in recent years, recording an increase in earnings each of the past six quarters. At the end of the current quarter, Pepper Pots, the company's staff accountant, calculated the ending inventory for the semiconductors and was surprised to find that the quantity of the Stark Hud 2020 model had not changed during the quarter. Pepper confirmed her calculation with the inventory control manager, who indicated that the sales of the Stark Hud 2020 had stopped when the Stark Hud 2024 semiconductor was released early in the quarter. Pepper researched the issue further and found that the Stark Hud 2024 semiconductor had the same applications as the Stark Hud 2020, but has more computing power and lower cost that the 2020. Pepper emailed this information to Tony Stark, the chief financial officer, and recommended that the company apply the lower-of-cost-or-market (LCM) method to the Stark Hud 2020 semiconductors in inventory. Later than day, Tony emailed Pepper back instructing her not to apply the LCM method to the 2020 inventory because "the company is under considerable pressure to maintain its track record of earnings growth, and LCM adjustment would result in a significant decline in earnings this quarter." Reluctantly, Pepper followed Tony's instructions.
Consider the decision not to apply the LCM method in the current quarter:
1) Who benefits from this decision?
2) Who is harmed by this decision?
3) Are Pepper and Tony acting in an ethical manner? Explain.
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