Discussion 1 ACC308
In 2010 the Moncrief Company purchased from Jim Lester the right to be the sole distributor in
the western states of a product called Zelenex. In payment, Moncrief agreed to pay Lester 20%
of the gross profit recognized from the sale of Zelenex in 2011.
If Moncrief purchases the additional units at year end under a periodic LIFO inventory system,
Moncrief reduces Jim Lester's payment by $40,000 ($210,000 – $170,000) and decreases gross
profit by $200,000 ($1,050,000 – $850,000). The net effect on before-tax income is a decrease of
$160,000 ($200,000 – $40,000). Since Moncrief does not intend to sell the units until 2014, the
only logical reason for purchasing more costly inventory at year-end is profit manipulation.
Discuss with your peers the ethical dilemma Moncrief faces in determining whether or not the
additional units should be purchased. Should Moncrief exercise its right to purchase inventory at
will, resulting in a reduction in net income, or recognize the rights of Jim Lester to receive profit
for the sale of his product, shareholders' rights to have their investment appreciate through
positive earnings, and government entities' rights to collect tax on economic net income? Why?
The periodic LIFO inventory system is when a company waits till year end to report cost
of goods sold. Also, the company uses the last price at which goods were bought to record cost of
goods sold. If Moncrief were to buy this additional product it would decrease profit because it is
costlier as well as the company will not make any sales until 2014. This could go either way for
Moncrief on one hand this is a smart business decision to stock up now to increase profit in the
coming years. However, on the other hand this could also end badly for Moncrief if product does
not move as the company predicted resulting in low profits.
Profit manipulation also known as income smoothing can be used from good business
methods to fraudulent reporting. Moncrief could use profit manipulation to reduce the cost of
goods sold by increasing production. This would be an unethical way to use this accounting
method and it abuses the leeway in accounting principles. I feel that Moncrief would also be
hurting the business relationship between Jim Lester and their company because it would not be
fair to Jim to earn less profit than intended. However, it does say that they agreed with Jim to pay
him 20% of the gross profit and with the company working under the periodic LIFO system the
profit can fluctuate as the cost of goods fluctuate throughout the year. Overall, this situation
could be looked at in either point of view.
D. Spiceland, J. S. (2017).