During the last month of the fiscal year, a company experienced extraordinarily

Question

During the last month of the fiscal year, a company experienced extraordinarily good sales, and severely depleted its base stock of merchandise. Since the company accounts for inventory using LIFO, the controller realized that cost of goods sold will be reduced by an extraordinary amount, inflating net income. This effect will be increased by the fact that the purchasing department negotiated some very good prices on merchandise during the year. The controller decided that a last-minute inventory purchase, at current higher prices, was the answer to the problem, and asked the purchasing department to check the inventory files and stock up on as many items as possible to be sure that the company did not have to

Explanation / Answer

The practice is frequently done by companies who do not wish to liquidate LIFO stocks. As long as

the merchandise is used within the usual time, this is not unethical. Emphasize to students that the

company may not, for example, return the inventory three days into the new year. Further, of course,

the inventory must be the property of the company (review the

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