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ACCOUNTING ETHICS

PREPARED BY: NAFEES REZA

What are ethical issues involved?


Here one ethical issue is involved which is disclosure of information. Disclosure information is useful for shareholder and other stakeholder to predict the amounts, timing and uncertainty of future cash flows.

What should Lewin do?


Here, Lewin have to disclose the information by showing the cost less accumulated depreciation and then the age of the assets will be apparent, which will be helpful for shareholder and other stakeholder to predict the amounts, timing and uncertainty of future cash flows. So he should provide information in following way: Property, plant and equipment Less: Accumulated depreciation Net Book Value $50,000,000 $40,000,000 $10,000,000

Explain to Julia what inventory profits as and how LIFO method could
reduce
In LIFO method, newer inventory is sold first and older remains in inventory. LIFO method lower profits, because LIFO method leads to high cost of goods sold and low ending inventory compared to FIFO method. This is because inflation, prices of newer goods higher than the older goods. Here, low ending inventory increase the cost of goods sold and this increased cost of goods sold reduces sales amount resulting to low profit. Example: Suppose a business firm has opening inventory about 1000 units at $5 and in August 1, 2012 it purchased 2000 units at $6 and in August 7, 2012 it purchased 3000 units at $8. The business firm sold 4000 units at $10 in August 10, 2012. So according to LIFO method in perpetual system:

Cost of goods sold 1. 30008 = 2. 10006 = Total = 24,000 6,000 $30,000 1. 2.

Ending Inventory 10006 = 10005 = Total = 6,000 5,000 $11,000

So in LIFO method cost of goods sold is $30,000 and ending inventory is $11,000 and it sold $40,000. So in LIFO method the gross profit is about 10,000. According to FIFO method: Cost of goods sold 1. 10005 = 2. 20006 = 3. 10008 = Total = 5000 12000 8000 $25,000 Total = $16000 Ending Inventory 1. 20008 = 16000

So in FIFO method cost of goods sold is $25,000 and ending inventory is $16,000 and it has a gross profit of $16,000. So LIFO reduces both inventory and profit.

The end

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