Thus, when components transferred from the OEM to the CM exceed finished products sent back from the CM to the
OEM, the production cost account has a credit balance. At the end of the period, the account is closed with a debit, with the
corresponding credit to Income Summary, thereby reducing reported costs and overstating reported income for that period. The
internal auditors understood that this accounting was technically incorrect but were informed that the impact on income would
be immaterial because parts held by the CMs were limited to approximately three days of production (
Independent Investigation Committee 2015
, 58). Based on this assurance, the internal auditors approved the accounting.
In contrast, in accounting periods when the CM sends more finished products to the OEM than components transferred by
the OEM to the CM, the production cost account would have a debit balance. At the end of the period, the account is closed
with a credit, with the corresponding debit to Income Summary, thereby reducing reported income for that period. Toshiba
inflated income in many accounting periods by shipping more components to the CM than needed to fulfill production needs.
When these outbound shipments exceeded finished products received from the CM, Toshiba generated more credits to the
Production Cost account than debits, thereby inflating reported income. This strategy to inflate income is similar to the practice
Caplan, Dutta, and Marcinko
Issues in Accounting Education
Volume 34, Number 3, 2019