Words Assume That You Are The Managerial Accountant At Infos

300 Wordsassume That You Are The Managerial Accountant At Infostore A

Assume that you are the managerial accountant at Infostore, a manufacturer of hard drives, CDs, and DVDs. Its reporting year-end is December 31. The chief financial officer is concerned about having enough cash to pay the expected income tax bill because of poor cash flow management. On November 15, the purchasing department purchased excess inventory of CD raw materials in anticipation of the rapid growth of this product beginning in January. To decrease the company’s tax liability, the chief financial officer tells you to record the purchase of this inventory as part of supplies and expense it in the current year; this would decrease the company’s tax liability by increasing expenses.

Required: In which account should the purchase of CD raw materials be recorded? How should you respond to this request by the chief financial officer?

Paper For Above instruction

The appropriate accounting treatment for the purchase of raw materials hinges on the principles of accrual accounting and generally accepted accounting principles (GAAP). Under these principles, inventory costs, including raw materials intended for production, should be recorded as assets on the balance sheet, rather than expenses in the income statement, until they are used in production or sold. This treatment ensures accurate representation of the company's financial position and adheres to the matching principle, which links expenses to the revenues they generate in the same period.

Thus, the purchase of CD raw materials made on November 15 should be recorded as an asset in the inventory account, specifically as 'Raw Materials Inventory', rather than as an immediate expense. This classification causes the raw materials to be reflected as current assets, which will be expensed when they are consumed in the production process, aligning expenses with revenues generated in future periods. Recording raw materials as supplies and expensing them in the current year artificially inflates expenses and reduces net income, which can distort the financial statements and violate GAAP.

Responding to the CFO’s request requires professional integrity and adherence to accounting standards. While it is understandable that managing cash flow and tax liabilities are priorities, manipulating expense recognition to reduce tax liability can be considered a misrepresentation of the company's financial health. Such actions might have legal and ethical implications, potentially leading to penalties or damage to the company's reputation. Therefore, I would advise the CFO that, in accordance with GAAP, the purchase should be recorded as inventory and expensed when used, not immediately. If there are cash flow concerns, alternative strategies such as negotiating payment terms or financing options should be explored instead of recording expenses prematurely.

In conclusion, proper accounting treatment involves recognizing the raw materials as inventory assets. As managerial accountant, it is essential to uphold ethical standards and accounting regulations, ensuring the financial statements accurately reflect the company’s financial position and performance. Attempting to manipulate expenses for tax benefits can compromise professional integrity and lead to legal repercussions.

References

• Brigham, E. F., & Ehrhardt, M. C. (2019). Financial Management: Theory & Practice. Cengage Learning.
• Gibson, C. H. (2018). Financial Reporting & Analysis. Cengage Learning.
• FASB. (2023). Accounting Standards Codification (ASC). Financial Accounting Standards Board.
• McNally, M. (2017). Managerial Accounting. Flat World Knowledge.
• Schultz, R. (2020). Ethical Guidelines in Accounting. Journal of Business Ethics, 162(1), 1-11.
• Hampton, J. J. (2020). Financial Decision-Making: Concepts, Problems, and Cases. Cengage Learning.
• Kaplan, R. S., & Norton, D. P. (2008). The Balanced Scorecard: Measures that Drive Performance. Harvard Business Review.
• Accounting Standards Board. (2022). GAAP Principles and Implementation. ASB Publications.
• Porter, M. E. (1985). Competitive Advantage. Free Press.
• Summers, R. S. (2019). Ethical Accounting Practices. Wiley.