Question

Case Study

Mary Tappin, an assistant Vice President at Galaxy Toys, was disturbed to find on her desk a memo from her boss, Gary Resnick, to the controller of the company. The memo appears below:

GALAXY TOYS INTERNAL MEMO

Sept 15

To: Harry Wilson, Controller

Fm: Gary Resnick, Executive Vice President

As you know, we won't start recording many sales until October when stores start accepting shipments from us for the Christmas season. Meanwhile, we are producing flat-out and are building up our finished goods inventories so that we will be ready to ship next month.

Unfortunately, we are in a bind right now since it looks like the net income for the quarter ending on Sept 30 is going to be pretty awful. This may get us in trouble with the bank since they always review the quarterly financial reports and may call in our loan if they don't like what they see. Is there any possibility that we could change the classification of some of our period costs to product costs, such as the rent on the finished goods warehouse?

Please let me know as soon as possible. The President is pushing for results.

Mary didn't know what to do about the memo. It wasn't intended for her, but its contents were alarming.

Required:

Q1:a. Why has Gary Resnick suggested reclassifying some period costs as product costs? (i.e., what is the reason behind such a suggestion and why do you think reclassifying period costs to product costs will improve the net operating income?)

Q2:b. Why do you think Mary was alarmed about the memo? (You might think of it from ethical and other perspectives).

Answer 1

a. Gary Resnick desires to sort some amount prices to product prices with the intention of showing higher Margin within the current quarter. because the sales in current quarter goes flat and there's plenty of inventory build up , point of entry desires to sort some amount prices into product price in order that a little of the amount price price are going to be moved to subsequent quarter as a part of the Closing finished merchandise and WIP inventory. As closing Finished merchandise and shutting WIP may be a credit to the operating statement ,this step can raise world wide web margin of the present quarter which can facilitate in presenting an improved monetary image before the bank.

b. Mary was afraid regarding the suggestion because the step recommended by point of entry is against accounting principles. amount prices aren't connected to product in any method and amount prices can not be treated as a part of iinventory made and carried forward with movement of inventory. amount prices area unit expensed get in a similar amount of occurence. There area unit specific classes of prices like direct materials, direct labor and producing overheads , that area unit known as product prices , which will be a part of the inventory price and people prices flow with the flow of inventory. Perriod prices like warehouse rent or management salalry or advertsining price can not be treated as Product price by any imagination. therefore the proposal of point of entry is against accounting principles and can positively not accepted by Auditors and Regulators as valid transactions.

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