Textbook Problem

Sizemo Elektroniks sells semiconductors that are used in games and small toys. The company has been extremely successful in recent years, recording an increase in earnings each of the past six quarters. At the end of the current quarter, Jay Shulz, the company’s staff accountant, calculated the ending inventory for the semiconductors and was surprised to find that the quantity of the Hayden 537X model had not changed during the quarter. Jay confirmed his calculation with the inventory control manager, who indicated that sales of the Hayden 537X had stopped when the Hayden 637X semiconductor was released early in the quarter. Jay researched the issue further and found that the Hayden 637X semiconductor has the same applications as the Hayden 537X, but has more computing power and a lower cost than the 537X. Jay e-mailed this information to Tina Vereen, the chief financial officer, and recommended that the company apply the lower-of-cost-or-market method to the Hayden 537X semiconductors in inventory. Later that day, Tina e-mailed Jay back, instructing him not to apply the lower-of-cost-or-market method to the 537X inventory because “the company is under considerable pressure to maintain its track record of earnings growth, and a lower-of-cost-or-market adjustment would result in a significant decline in earnings this quarter.” Reluctantly, Jay followed Tina’s instructions.

Evaluate the decision not to apply the lower-of-cost-or-market method in the current quarter.

1. 1. Who benefits from this decision?
2. 2. Who is harmed by this decision?
3. 3. Are Jay and Tina acting in an ethical manner? Explain.