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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Interpretation of GAAP and Ethical Issues Robin Smith is considering buying shares in Mah Company. The company has reported an increase in net income this year. On careful reading of the notes to the financial statements, Robin learns that the company had a LIFO liquidation this year. Robin understands what caused the liquidation but has asked you for advice about how to interpret it.

Required:

  1. 1. Prepare a short memo to Robin to answer the question.
  2. 2. Could a LIFO liquidation profit create ethical issues?

1.

To determine

Write a memo to Person RS for the interpretation of LIFO liquidation in the financial statements

Explanation

Memo

To,

Person RS,

The LIFO liquidation means when costs of earlier periods are included in goods sold that result in lower amount of cost of goods sold and higher profit. During the evaluation of trend in profits of a company, there might be certain reasons of LIFO liquidation that should be considered. Several reasons may lead to different interpretations of the holding gain. The LIFO liquidation profit increases the net income and is reported in the notes to financial statements. The most possible reasons are:

  • The implementation of just-in time inventory (JIT) system: In this case, the holding gain would represent an increase in wealth of the company because the stock would not be replaced. But, the holding gain should be excluded from net income while using trend analysis because it cannot be frequent in each year...

2.

To determine

Explain whether the LIFO liquidation profit could create an ethical issue.

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