Question

Assume that you are the managerial accountant at Infostore, a manufacturer of hard drives, CDs, and DVDs. Its reporting year-end is December 31. The chief financial officer is concerned about having enough cash to pay the expected income tax bill because of poor cash flow management. On November 15, the purchasing department purchased excess inventory of CD raw materials in anticipation of rapid growth of this product beginning in January. To decrease the company’s tax liability, the chief financial officer tells you to record the purchase of this inventory as part of supplies and expense it in the current year; this would decrease the company’s tax liability by increasing expenses.

Required:

1.     1) In which account should the purchase of CD raw materials be recorded? Which financial statement does this account show up on?

2.     2) How should you respond to this request by the chief financial officer?

Answer 1

Ans 1)

Purchase of CD raw materials is to be recorded in 'Raw Material Inventory Account' which is shown under assets side of Balance sheet as this has not yet been used in production of goods.

Ans 2)

The request of Chief Financial Officer to record the purchase of this inventory as part of supplies and expense it in the current year is not viable as it leads to tax evasion which is not legally permissible. Inventory is a part of balance sheet not of expense. If request of CFO is followed then it will give incorrect picture of financial position of the company and lastly it also increases tax burden on the company.

If CFO is not satisfied with me then it is my duty to discuss the matter with Internal auditors or board of directors wherever required.