Question

Create a response to the following discussion post:

"When units of product are sold, their costs are released from inventory as expenses" (Garrison, Noreen, & Brewer, 2018, p. 29). So when Gallant "reclassifies" his businesses period costs to product costs, he does not have to show it as an expense until the product is sold. This allows him to have a year end report showing higher earnings. Which Gallant predicted a 20% earning increase to his investors by the end of the year.

This is absolutely unethical, this would be known as financial statement manipulation. "Financial statement manipulation is an ongoing problem in corporate America" (Adkins, 2019). There are many ways people manipulate financial statements and many reason why but they still remain unethical and illegal for the most part. Management would do this because they may earn more money if they showed the company made more money. In this case, Gallant wanted the books to show the 20% increase that he had predicted but in reality the business did not earn that 20%, they would just show it next year when the product was sold.

Answer 1

The above situation of Gallant is completely unethical and illegal. A company is supposed to show expense when the money has been used for procurement of raw material and for undergoing manufacturing process. This is as per the Accrual concept. The Accrual concept states that revenue must be recognized when money is earned by sale of the product and expense is recognized when asset is consumed. In the given case, the recognition of revenue was done at the right time but the recognition of expense was being delayed. This affects the financial position and condition of the firm. The firm will not be providing the correct picture to its investors and shareholders if the accrual concept is violated. Such change in the recording of information can be considered as manipulation and tampering of financial data or information.