Question

Here’s what happened at ACME Manufacturing Company*:

ACME makes shock absorbers for the Mercedes manufacturing facility and for a few other customers. Two days before the auditors arrived to count ending inventory, the plant manager told the warehouse employees to load four tractor trailers with shock absorbers, lock them and park the trailers on the back lot.   After giving those instructions she said: “If anyone mentions this to the auditors, I will find out who you are and fire you!”   So, no one said a word.

Other facts that you should know:

Mercedes uses Just-in-Time for its inventory system.

ACME's terms for shipping and billing are FOB shipping point, prepaid and add.

Respond to the following:

Why did the manager order employees to hide the inventory?

How does what she did affect the financial statements?

What should the plant accountant do, if anything, about this situation?

Answer 1

In the given case,ACME is a manufacturing company that makes shock absorber.It is given that the company uses Just-in-time for its inventory.Just-in-time (JIT) inventory management, is a strategy that manufacturers use to increase efficiency. The process involves ordering and receiving inventory for production and customer sales only as it is needed to produce goods, and not before.

In simple words it means order as per demand.Here though the company as per books follow Just-in-time,has huge inventory stock lying with them which is questionable and will lead to an adverse comment by the auditor and hence the manager ordered the employee to hide those inventories.

The effect of what she did will be seen drastically in the financial statement as the absense of these will lead to window dressing as the manager is trying to hide all costs relating to inventory purchase and management.The financial statements will appear more profitable than acual.

The plant accountant should ideally inform this incident to those with governanace or the audit committee if there is one such committee since not doing so not only shows wrong picture of accounts but in future can also lead him to be punishable for being part of such fraud.