(d) What are the potential disadvantages of the LCNRV method? CA9-2. LCNRV) The

Question

(d) What are the potential disadvantages of the LCNRV method? CA9-2. LCNRV) 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 wrnite 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 declime in net realizable value 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?

Explanation / Answer

Answer a. Using the cost of goods method is against the concept of materiality. In cost of goods method the loss wiil be added in the cost of goods sold accounts and so Income Statement will not relect any type of loss, while in loss method the loss due to write downs would be shown as separate from the COGS. Answer b. In actual, stakeholders are affected, whether any method is used. Answer c. As an accountant Sheryl should not compromise her integrity. One thing she can do is trying explaining to her boss how his idea may affect the company in the future and suggest another method be used that does not affect how COGS stated.

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