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Ethics Case 9-11 on
page 497
Danville Bottlers is a
wholesale beverage company. Danville uses the FIFO inventory method to
determine the cost of its ending inventory. Ending inventory quantities are
determined by a physical count. For the fiscal year- end June 30, 2011, ending
inventory was originally determined to be $3,265,000. However, on July 17,
2011, John Howard, the company’s controller, discovered an error in the ending
inventory count. He determined that the correct ending inventory amount should
be $2,600,000.
Danville is a privately
owned corporation with significant financing provided by a local bank. The bank
requires annual audited financial statements as a condition of the loan. By
July 17, the auditors had completed their review of the financial statements
which are scheduled to be issued on July 25. They did not discover the inventory
error.
John’s first reaction
was to communicate his finding to the auditors and to revise the financial
statements before they are issued. However, he knows that his and his fellow
workers’ profit-sharing plans are based on annual pretax earnings and that if
he revises the statements, everyone’s profit-sharing bonus will be
significantly reduced.
Required:
1. Why will bonuses be negatively affected? What
is the effect on pretax earnings?
2. If the
error is not corrected in the current year and is discovered by the auditors
during the following year’s audit, how will it be reported in the company’s
financial statements?
3. Discuss
the ethical dilemma John Howard faces.
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