Stacy Lynn Inc Sli Is A Manufacturer Of Rice Cookers

Stacy Lynn Inc Sli Is A Manufacturer Of Rice Cookers

Stacy Lynn, Inc. (SLI) is a manufacturer of rice cookers. The company sells each rice cooker for $45, with sales of 3,600 units in 2009. At the end of 2009, SLI has 400 units available for sale and projects sales of 4,400 units in 2010. The planned production for 2010 is 4,000 units, the same as in 2009. Variable manufacturing costs are $16 per unit, and variable selling costs are $0.50 per unit. Fixed manufacturing costs amount to $100,000 annually, and fixed selling costs are $500 annually. There was no beginning inventory in 2009. Stacy Ann Lynn, the great-granddaughter of the company's founder, is the current CEO/President. The company has faced pricing pressures from imports and is currently focused on maintaining operations until economic conditions improve.

SLI is seeking to secure a large line of credit from its bank to sustain operations. The bank expects financial statements that conform to Generally Accepted Accounting Principles (GAAP) and aims to see maximum profit figures over the past two years. The company must decide which costing method to present to maximize profit for the bank while complying with GAAP, and then analyze the legal and ethical implications of these choices.

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Paper For Above instruction

Introduction

Stacy Lynn Inc. (SLI), a family-owned business specializing in rice cookers, faces multiple challenges including price competition from Chinese imports and economic downturns. As SLI seeks to secure funding through a line of credit, it must carefully select an accounting approach to present its financial performance. The decision involves balancing maximizing profit presentation with legal and ethical considerations, all under the constraints of GAAP compliance. This paper explores the appropriate costing methods for SLI—absorption costing and variable costing—and discusses their implications for financial reporting, ethical considerations, and legal compliance.

Understanding Costing Methods

The primary difference between absorption costing and variable costing lies in how they treat fixed manufacturing costs. Absorption costing, also known as full costing, allocates all manufacturing costs—both fixed and variable—to products. This method aligns with GAAP requirements for external reporting and ensures that inventory includes a proportionate share of fixed manufacturing costs (Garrison et al., 2018). Conversely, variable costing, also called direct-costing, considers only variable manufacturing costs as product costs, treating fixed manufacturing costs as period expenses (Drury, 2013).

For SLI, understanding these distinctions is critical because the choice of method directly affects net income figures. Absorption costing generally results in higher reported income during periods of increasing inventory because some fixed manufacturing costs are deferred in inventory. In contrast, variable costing expends all fixed manufacturing costs in the period incurred, often resulting in lower net income.

Analysis for Maximizing Profit Presentation

To demonstrate maximum profit over the two-year period to the bank, SLI should consider which method produces the highest net income. Assuming production exceeds sales in 2009, absorption costing would lead to higher profitability because some fixed manufacturing costs are embedded in unsold inventory and deferred to future periods (Garrison et al., 2018). This deferral can inflate periods with increasing inventory levels, which in this case, aligns with the projected sales growth in 2010.

However, it’s essential to recognize that maximizing profit presentation solely for external stakeholders, especially when based on accounting choices, may obscure the actual economic performance of the company. In 2009, if inventory increased, absorption costing could inflate profit figures, but these are not necessarily reflective of cash flow or operational success.

Legal and Ethical Considerations Under GAAP

Despite the potential for absorption costing to show higher profits, GAAP mandates that external financial statements must adhere to full-costing methods, which is consistent with absorption costing. Using variable costing for external reporting can be viewed as non-compliant unless properly disclosed, which could have legal ramifications for misrepresentation (FASB, 2014).

From an ethical perspective, presenting financial statements that distort true profitability to secure favorable bank terms raises questions about transparency and integrity. It is ethically imperative to provide honest disclosures and ensure that financial statements reflect genuine economic conditions, even if they do not maximize the perceived profit.

SLI must also consider that artificially inflating profits could lead to future legal liability, especially if the financial statements are audited or scrutinized. Ethically, managers have a duty to provide truthful information that aligns with GAAP, maintaining stakeholders' trust and integrity.

Conclusion

In summary, for external reporting to satisfy GAAP requirements, Stacy Lynn Inc. should adopt the absorption costing method. This method complies with GAAP standards and provides the bank with a realistic picture of the company's profitability. While absorption costing may show higher profit levels, ethical and legal standards demand transparency and honesty in financial disclosures. Balancing the desire to present strong financials with adherence to established accounting principles and ethical standards is crucial for maintaining credibility and legal compliance. SLI's decision should be driven by accurate reporting, not solely by the desire to inflate profit figures, to ensure long-term sustainability and trust.

References

  • Drury, C. (2013). Management and Cost Accounting. Cengage Learning.
  • Financial Accounting Standards Board (FASB). (2014). Accounting Standards Codification. FASB.
  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
  • Kaplan, R. S., & Cooper, R. (2013). Cost & Effect: Using Integration to Drive Profit. Harvard Business Review Press.
  • Horngren, C. T., Datar, S. M., Rajan, M. V., & Ittner, C. D. (2015). Cost Accounting: A Managerial Emphasis. Pearson.
  • Schiff, A. (2017). Ethical Dilemmas in Financial Decision-Making. Journal of Business Ethics, 146(2), 301-312.
  • Block, S. B., & Hirt, G. A. (2015). Foundations of Financial Management. McGraw-Hill Education.
  • Epstein, M. J., & Jermakowicz, E. K. (2010). IFRS: Policies and Procedures. Wiley Publishing.
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  • American Institute of Certified Public Accountants (AICPA). (2020). Code of Professional Conduct. AICPA.

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