The net realizable value of Lake Corporation’s inventory has declined below its cost. Allyn Conan, the controller, wants to use the loss method to write down inventory because it more clearly discloses the decline in the net realizable value and does not distort the cost of goods sold. His supervisor, financial vice president Bill Ortiz, prefers the costof-goods-sold method to write down inventory because it does not call attention to the decline in net realizable value.InstructionsAnswer the following questions.(a) What, if any, is the ethical issue involved?(b) Is any stakeholder harmed if Bill Ortiz’s preference is used?(c) What should Allyn Conan do?

The net realizable value of Lake Corporation’s inventory has declined below its cost. Allyn Conan, the controller, wants to use the loss method to write down inventory because it more clearly discloses the decline in the net realizable value and does not distort the cost of goods sold. His supervisor, financial vice president Bill Ortiz, prefers the costof-goods-sold method to write down inventory because it does not call attention to the decline in net realizable value.InstructionsAnswer the following questions.(a) What, if any, is the ethical issue involved?(b) Is any stakeholder harmed if Bill Ortiz’s preference is used?(c) What should Allyn Conan do?

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Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter5: Professional Auditing Standards And The Audit Opinion Formulation Process

Section: Chapter Questions

Problem 18CYBK

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The net realizable value of Lake Corporation’s inventory has declined below its cost.Allyn Conan, the controller, wants to use the loss method to write down inventory because itmore clearly discloses the decline in the net realizable value and does not distort the cost ofgoods sold. His supervisor, financial vice president Bill Ortiz, prefers the cost-of-goods-soldmethod to write down inventory because it does not call attention to the decline in net realizablevalue.Instructions Answer the following questions:(a) What, if any, is the ethical issue involved?(b) Is any stakeholder harmed if Bill Ortiz’s preference is used?(c) What should Allyn Conan do?
Vanity Corporation sells different types of paint. Due to the low demand, it would be testing its inventory for impairment. It acquired the following data: What amount should be reported by Vanity Corporation as loss from inventory write-down?
Which statements below are true? 1. LCM and LCNRV may be applied by individual products, by product category or by total inventory. 2. A firm that wants to minimize the negative impact of inventory write-down on net income should apply LCM or LCNRV by individual products. 3. If inventory write-down is usual and not substantial, a firm should debit "Loss on inventory write-down” and credit "Inventory". 4. LCM and LCNRV applied by total inventory will result in higher value of inventory and lower inventory write-down than by individual products, by product category. 5. If inventory write-down is unusual and substantial, a firm should debit "Cost of good sold" and credit "Inventory".
Which of the following statement is not valid as it applies to inventory costing method? A) If inventory quanities are to be maintained, part of the earning must be invested (plowed back) in inventories when FIFO is used during a period of rising prices. B) LIFO tends to smooth ou the net income patterns by matching currents cost of goods sold with current revenue, when inventories remain at costant quantities. C) When a firm using the LIFO method fails to maintain its usual inventory position (reduces stock on hand below customary levels), there may be a matching of old cost with current revenue. D) The use of FIFO permits some control by managment over the amount of net income for a period through controlled purchase, which is not true with LIFO.
A company embarked on a lean initiative and was able to significantly reduce of levels of inventory. Which of the following would not occur as a result? Decrease in overall time to produce the part Highlighting of other problems which the inventory may be masking Reducing waste of space and excess containers Decrease in inventory carrying costs. None of the above. (All would occur.
You have been asked by the financial vice president to develop a short presentation on the LCNRV method for inventory purposes. The financial VP needs to explain this method to the president because it appears that a portion of the company’s inventory has declined in value. Instructions The financial vice president asks you to answer the following questions. a. What is the purpose of the LCNRV method? b. What is meant by “net realizable value”? c. Do you apply the LCNRV method to each individual item, to a category, or to the total of the inventory? Explain. d. What are the potential disadvantages of the LCNRV method?
Which one of the following statements is true? a. Income manipulation is difficult under LIFO.b. Accounting principles do not require that the inventory cost flow approximate the physical flow of goods.c. Companies may use LIFO for tax purposes and FIFO in the financial statements.d. In periods of declining prices, LIFO will result in the payment of less income taxes.
A company that is under extreme pressure to meet its earnings goals would be more likely to use the FIFO method of inventory costing. less likely to report its pro forma income in its annual report. more likely to engage in channel stuffing. O less likely to use the LIFO method of inventory costing.
ts) An auditor recently asked an accounting manager to perform a LCM test on a batch of inventory. Since the manager would prefer to avoid the cost of a LCM test, what GAAP argument could she use to avoid performing the test? O The cost of the test would not outweigh the benefit of the result. O Why don't you perform the test? That's what we are paying you for. O I have no reason to believe future value has dropped below the historical cost. h O The recorded cost accurately represents the costs when the inventory was produced.
Which of the following statements regarding the lower of cost and net realizable value (LCNRV) rule is true? a.The LCNRV rule is an application of the cost principle. b.When the net realizable value of inventory drops below the cost of inventory, an adjustment is made to decrease inventory to its net realizable value and decrease income. c.If a company uses the LCNRV rule, there is no need to use a cost flow assumption such as FIFO, or weighted average cost. d.When the net realizable value of inventory is above the cost of inventory, an adjustment is made to increase inventory to its net realizable value and increase income.
48)The situation that requires a departure from the cost basis of accounting to the lower-of- cost-or-net-realizable-value basis in valuing inventory is necessitated by A)a desire for more profit. B)an increase in the value of the inventory. C)a decline in the value of the inventory. D)an increase in selling price.
Which of the following regarding the lower of cost ormarket rule for inventory are true?(i) The lower of cost or market rule is an example of thehistorical cost principle.(ii) When the market value of inventory drops belowthe original cost of inventory shown in the financialrecords, net income is reduced.(iii) When the market value of inventory drops belowthe original cost of inventory shown in the financialrecords, total assets are reduced.a. (i) only c. (ii) and (iii)b. (ii) only d. All of the above