Student Name: Zhao Chen
Student ID: 22811743
Module 3, Group 1, Case 9-11
Date: September 20, 2012
Ethics Case 9-11 Overstatement of ending
inventory Requirement 1
In this case, everyone’s profit-sharing bonus will be affected. We know that: Beginning
inventory + Net Purchases = Cost of good available for sale; cost of good available for sale –
ending inventory = cost of good sold (Spiceland, Sepe, & Nelson, 2013).
If the ending inventory reduces, the cost of good sold would be increased, and thus result in a
lower pretax income. In this case, if John don’t revise the financial statement, the pretax income
is overstated by $665,000 (3,265,000 – 2,600,000 = $665,000).
Requirement 2
If the error is discovered by the auditors during the following year’s audit, Danville Bottle’s
financial statement ending June 30, 2013 will be restated to reflect the correct inventory amount,
cost of good sold, net income, and retain earning ((Spiceland, Sepe, & Nelson, 2013).
The following journal entry would corrects the error:
Retained earnings..........................................$665,000
Inventory.............................................$665,000.
Also, the correction will be reported as a prior period adjustment to the retained earning balance
for beginning of fiscal year on July 1, 2014 in Danville Bottle’s statement of shareholder’s
equity (Spiceland, Sepe, & Nelson, 2013).
Requirement 3
Student Name: Zhao Chen
Student ID: 22811743
Module 3, Group 1, Case 9-11
Date: September 20, 2012
In this case, the ethical dilemma John face is his responsibility to report the error in the ending
inventory to the auditors, on another hand, if John reports the error, his co-worker’s profit-
sharing bonus will be reduced since his co-workers’ profit sharing plans are based on annual
pretax earnings.
References
Spiceland, J. D., Sepe, J. F., & Nelson, M. W. (2013). Intermediate Accounting (7th ed.).
New York, NY: McGraw-Hill/Irwin.
Student Name: Zhao Chen
Student ID: 22811743
Module 3, Group 1, Case 9-11
Date: September 20, 2012
Response to judgment case 9 – 1 Inventoriable costs; lower of cost or market; retail
inventory method.
There is additional information I would like to add to Kara’s discussion.
Requirement 1
Theoretically, Hudson should include warehousing cost to its inventory costs. Inventory costs
consist of ordering cost, carrying cost, and shortage or stock out cost & cost of replenishment
(Management study guide, Sept 22, 2012). Warehousing cost, such as rent, utilities, and
expense, are part of carrying cost, therefore, it should be include to Hudson’s inventory costs.
Requirement 2
a. In general, LCM is used to value inventory because LCM recognizes decrease but not
increase in inventory value. Recognizing the increase in inventory value prior to sale
would create uncertainty as the pre-tax income increase.
b. Replacement cost should be reported in Hudson’s balance sheet. According to LCM,
Hudson’s replacement cost is in between NRV and NRV – NP, so Hudson’s should
use replacement cost.
Requirement 3
Hudson’s freight costs and net markups should be added to cost-to-retail percentage. Net
markdowns should be deducted from cost-to-retail percentage.
Requirement 4
Student Name: Zhao Chen
Student ID: 22811743
Module 3, Group 1, Case 9-11
Date: September 20, 2012
Hudson’s retail inventory method approximate lower of average cost or market is due to
markdowns was subtracted from cost-to-retail percentage.
Reference
Management study guide, inventory cost, Retrieved September 22, 2012, from
http://www.managementstudyguide.com/inventory-costs.htm
