Asked by Ashley Young on Jun 29, 2024
Verified
Mary Tappin, an assistant Vice President at Galaxy Toys, was disturbed to find on her desk a memo from her boss, Gary Resnick, to the controller of the company. The memo appears below:
GALAXY TOYS INTERNAL MEMO
Sept 15
To: Harry Wilson, Controller
Fm: Gary Resnick, Executive Vice President
As you know, we won't start recording many sales until October when stores start accepting shipments from us for the Christmas season. Meanwhile, we are producing flat-out and are building up our finished goods inventories so that we will be ready to ship next month.
Unfortunately, we are in a bind right now since it looks like the net income for the quarter ending on Sept 30 is going to be pretty awful. This may get us in trouble with the bank since they always review the quarterly financial reports and may call in our loan if they don't like what they see. Is there any possibility that we could change the classification of some of our period costs to product costs-such as the rent on the finished goods warehouse?
Please let me know as soon as possible. The President is pushing for results.
Mary didn't know what to do about the memo. It wasn't intended for her, but its contents were alarming.
Required:a. Why has Gary Resnick suggested reclassifying some period costs as product costs?b. Why do you think Mary was alarmed about the memo?
Period Costs
Expenses that are not directly tied to production activities and are expensed in the period they are incurred, such as administrative and selling expenses.
Product Costs
Expenses directly associated with the creation of a product, including direct labor, materials, and manufacturing overhead.
Finished Goods Inventory
Inventory of finished goods available for sale by a business.
- Comprehend and distinguish between the costs associated with products and those tied to periods.
- Understand the ethical considerations in financial reporting.
Verified Answer
b. Mary Tappin is probably alarmed by both the economic situation the company finds itself in and by the apparent willingness of top management to bend the rules. Improperly reclassifying costs is an indication that top management does not feel like it has to play by the rules or be honest in its dealings with the bank. With such loose ethical standards, Mary may wonder what other unethical things they are doing.
Learning Objectives
- Comprehend and distinguish between the costs associated with products and those tied to periods.
- Understand the ethical considerations in financial reporting.
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