Ethics Case #3 During 2014 Crop-Paper-Scissors a craft store began operations and chose to use the FIFO inventory costing method. After creating their financial statements for 2014 the company realized that it would prefer to use the LIFO inventory costing method instead. So Crop-Paper-Scissors switched to the LIFO method in 2015. Due to a change in the economy the company realized that it would in fact be better for them to use the FIFO method. So in 2016 they switch back to FIFO. After analyzing the swing in the numbers over the past few years they decide to smooth things out a bit by trying average costing in 2017. (Horngren’s Financial & Managerial Accounting: The Financial Chapters 4e Pearson Publishing p. 426) 1. What impact(s) will these actions have on the company’s financial statements? Be sure to discuss the balance sheet and the income statement separately and be specific about their functions impaired. b. The investors The false financial reports can give a good impression to the investors. They can be tempted to do business with the company. They can be harmed if the company is not making profits. c. The auditors They will find it difficult to compare the financial reports from one year to another. And when they fail to report the inconsistency during audit they can be liable. d. The shareholders In case of understated profits the shareholder’s profits or dividends can be low and they will not get the returns from their investments. 5. As a personal friend what advice would you give to the accountant who works for Crop-Paper-Scissors? The accountant should practice integrity and promote all principles of accounting in every situation. The reports drawn by the accountant should be true and honest to promote ethics or to avoid fines penalties or lawsuits. [...]
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