M. K. Gallant is president of Kranbrack Corporation, a company whose stock is traded on a nationalexchange. In a meeting with investment analysts at the beginning of the year, Gallant had predicted thatthe company’s earnings would grow by 20% this year. Unfortunately, sales have been less than expectedfor the year, and Gallant concluded within two weeks of the end of the fiscal year that it would be impossible to ultimately report an increase in earnings as large as predicted unless some drastic action was taken.Accordingly, Gallant has ordered that wherever possible, expenditures should be postponed to the newyear—including canceling or postponing orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-year advertising and travel. Additionally, Gallant ordered the company’scontroller to carefully scrutinize all costs that are currently classified as period costs and reclassify as manyas possible as product costs. The company is expected to have substantial inventories of work in processand finished goods at the end of the year.Required:1. Why would reclassifying period costs as product costs increase this period’s reported earnings?2. Do you believe Gallant’s actions are ethical? Why or why not?
M. K. Gallant is president of Kranbrack Corporation, a company whose stock is traded on a national
exchange. In a meeting with investment analysts at the beginning of the year, Gallant had predicted that
the company’s earnings would grow by 20% this year. Unfortunately, sales have been less than expected
for the year, and Gallant concluded within two weeks of the end of the fiscal year that it would be impossible to ultimately report an increase in earnings as large as predicted unless some drastic action was taken.
Accordingly, Gallant has ordered that wherever possible, expenditures should be postponed to the new
year—including canceling or postponing orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-year advertising and travel. Additionally, Gallant ordered the company’s
controller to carefully scrutinize all costs that are currently classified as period costs and reclassify as many
as possible as product costs. The company is expected to have substantial inventories of work in process
and finished goods at the end of the year.
Required:
1. Why would reclassifying period costs as product costs increase this period’s reported earnings?
2. Do you believe Gallant’s actions are ethical? Why or why not?
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