27th Edition
WARREN + 5 others
ISBN: 9781337272094




27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Ethics in Action

Margie Johnson is a staff accountant at ToolEx Company, a manufacturer of tools and equipment. The company is under pressure from investors to increase earnings, and the president of the company expects the accounting department to “make this happen.” Margie’s boss, who has been a mentor to her, is concerned that if earnings do not increase, he will be terminated.

Shortly after the end of the fiscal year, the company performs a physical count of the inventory. When Margie compares the physical count to the balance in the inventory account, she finds a significant amount of inventory shrinkage. The amount is so large that it will result in a significant drop in earnings this period. Margie's boss asks her not to make the adjusting entry for shrinkage this period. He assures her that they will get “caught up” on shrinkage in the next period, after the pressure is off to reach this period’s earnings goal. Margie’s boss asks her to do this as a personal favor to him.

What should Margie do in this situation? Why?

To determine

Inventory Shrinkage: It represents the loss of inventory. In other words, it refers to the difference between the amount of inventory shown in the accounting records and the actual inventory. The difference indicates the issues with the inventory caused due to lost, theft, clerical errors, damaged goods or spoilage.

In this case Company T is pressuring the accounting department to increase the earnings. Ms. M is an accountant in Company T. Ms. M’s boss already informed her that if the earnings will not increase then he will be terminated.

After the end of the fiscal year Ms. M compares the physical count to the balance in the inventory account, and finds a huge amount of inventory shrinkage. This amount is so huge that the earnings will drop significantly. Ms. M’s boss requests her to not to make any adjusting entry for the inventory shrinkage.

To Explain: The action of Ms. M for the above situation and its reason.


Ms. M, the accountant is in a very difficult situation because of her boss. As her boss is the person whom she trusts and respects the most. Someone who guided her now asked her to do something unethical. If Ms. M makes the adjusting entry then her boss will terminated definitely.

However, the primary responsibility of Ms...

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