.K. Gallant is President of Kranbrack Corporation, a company whose stock is traded on a national exchange.  In a meeting with investment analysis 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 whenever possible, expenditures should be postponed to the new-year-including cancelling 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 curre

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter7: Common Stock: Characteristics, Valuation, And Issuance
Section: Chapter Questions
Problem 22P
icon
Related questions
Question

M.K. Gallant is President of Kranbrack Corporation, a company whose stock is traded on a national exchange.  In a meeting with investment analysis 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 whenever possible, expenditures should be postponed to the new-year-including cancelling 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 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 were ethical?  Why or why not?
Expert Solution
steps

Step by step

Solved in 2 steps

Blurred answer
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Financial Accounting
Financial Accounting
Accounting
ISBN:
9781337272124
Author:
Carl Warren, James M. Reeve, Jonathan Duchac
Publisher:
Cengage Learning