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.

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.

* 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

We'll be glad to comment on your answers.

Answer 2

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.

Answer 3

Yes. Bobpursley is right.

http://www.jiskha.com/display.cgi?id=1289502089

Answer 4

1. Reclassifying period costs as product costs can increase this period's reported earnings because product costs are capitalized and included in the cost of inventory. In other words, when costs are reclassified as product costs, they are no longer immediately expensed as period costs, but rather added to the value of the inventory on the company's balance sheet. As a result, the expenses are spread out over time and deducted from revenue gradually, which increases the reported earnings for the current period.

2. Whether Gallant's actions are ethical or not is subjective and can be interpreted differently depending on one's moral framework. Some arguments supporting Gallant's actions might include the need to meet shareholder expectations or maintain the company's financial health. However, others may view Gallant's actions as unethical for several reasons:

- Misleading investors: By reclassifying costs and postponing expenditures, Gallant may be providing a distorted picture of the company's financial health to investors and stakeholders who rely on accurate and transparent information.
- Manipulating financial results: Gallant's actions can be seen as an attempt to manipulate the financial statements and artificially inflate earnings by postponing expenses and shifting costs from one reporting period to another.
- Breach of trust: Gallant has a fiduciary duty to act in the best interest of the company and its stakeholders. Ordering actions to manipulate financial results can be perceived as a breach of that duty, eroding trust and credibility.

Ultimately, the assessment of Gallant's actions as ethical or unethical would depend on individual perspectives and the ethical standards applied.