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Managerial Accounting

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M.K. Gallant is president of Kranbrack Corporation, a company whose stock is traded on a national exchange. In a meeting with investment analysts at the beginning of the year, Gallant had predicted that the company’s earnings would grow by 20% this year. Unfortunately, sales have been less than expected for the year, and Gallant concluded with two weeks of the end of the fiscal year that it would impossible to ultimately report an increase in earning as large as predicted unless some drastic action was taken. Accordingly, Gallant has ordered that wherever possible, expenditures should be postponed to the new year – including canceling or postponing orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-the-year advertising and travel. Additionally, Gallant ordered the company’s controller to carefully scrutinize all costs that are currently classified as period costs and reclassify as many as possible as product costs. The company is expected to have substantial inventories of work in process and finished goods at the end of the year. Comment on the following questions.

* Why would reclassifying period costs as product costs increase this period’s reported earnings?
* Do you believe Gallant’s actions are ethical? Why or why not?

  • Managerial Accounting -

    We'll be glad to comment on your answers.

  • Managerial Accounting -

    If they are product costs, they could be carried on the books until the product is sold, making a short term "reduction" in costs.

    Ethical? It is smoke and mirrors, it is legal, and it does hide costs that ultimately will need to be paid.

    If I were the accounting firm certifying the balance sheet, it would be worthy of an accounting note on the statement.

  • Managerial Accounting -

    Yes. Bobpursley is right.

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