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. Respond to at least two of your fellow students’ postings.

Question

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. Respond to at least two of your fellow students’ postings.

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?

Answer 1

Did you read and understand this part?

"Comment on the following questions. Respond to at least two of your fellow students’ postings."

These need to be YOUR THOUGHTS, not the thoughts of anyone else. You probably need to go back and read your course materials (text, etc.); then think about it all; then come to a conclusion and post on your class's message board.

Answer 2

Reclassifying period costs as product costs can increase this period's reported earnings because product costs are only recognized when a product is sold. By reclassifying certain costs as product costs, the expenses will be deferred and recognized as the cost of goods sold when the products are eventually sold. This means that the expenses will not be immediately recognized, resulting in lower expenses and higher reported earnings for the current period.

Regarding the ethics of Gallant's actions, it can be argued that they raise ethical concerns. By postponing expenditures and canceling orders, the company may be compromising its relationships with suppliers and potentially damaging its reputation in the long run. Additionally, reclassifying costs to manipulate earnings can be seen as a form of financial misrepresentation.

However, it is also worth considering the context and intent behind Gallant's actions. If Gallant genuinely believes that taking these measures is necessary to avoid reporting a significant decline in earnings, his actions may be seen as an attempt to protect the company's interests. Nonetheless, it is important for Gallant to consider the potential negative consequences and long-term implications of these decisions. Ultimately, the judgment of the ethicality of his actions will depend on individual perspectives and ethical frameworks.