Question

Ever since he was a kid, Carl Montague wanted to be a pro football player. When that didn’t work out, he found another way to channel his natural competitive spirit: He bought a small auto parts store in Kentucky that was deep in red ink (negative earnings). At the end of the year, he created “ghost” inventory by recording fake inventory purchases. He offset these transactions by “adjustments” to Cost of Goods Sold, thereby boosting profit and strengthening the balance sheet. Fortified with great financials, he got bank loans that allowed him to build up a regional chain of stores, buy a local sports franchise, and take on the lifestyle of a celebrity. When the economy in the region tanked, he could no longer cover his losses with new debt or equity infusions, and the whole empire fell like a house of cards.

For this week’s discussion, please respond to the questions listed below. In addition to your initial response, please be sure to respond to at least two other students’ initial responses, as well.

Required Responses:

1. Based on the facts provided, would the bank loan officer reviewing the application have sufficient information to detect fraud or falsified information?

2. Assume the bank officer was unable to detect any foul play. What other stakeholders or related parties could be negatively impacted by the actions of Carl Montague?

3. What kind of adjustment to Cost of Goods Sold (debit or credit) would have the effect of boosting earnings?

Answer 1

Solution:-

1. Based on the facts provided, would the bank loan officer reviewing the application have sufficient information to detect fraud or falsified information:-

No. I don’t believe the bank loan officer reviewing the loan application had sufficient information to detect any fraud.

2. Assume the bank officer was unable to detect any foul play. What other stakeholders or related parties could be negatively impacted by the actions of Carl Montague:-

The people which are going to be affecrted by actions of Carl Montague are the lenders, shareholders and employees.

3. What kind of adjustment to Cost of Goods Sold (debit or credit) would have the effect of boosting earnings:-

The cost of goods will be credited which will in turn decrease rhe purchases costand will in return increase the gross profit.