1. The market value of Lake Corporation's inventory has declined below its cost. Vickie Maher, the controller, wants to use the allowance method to write down inventory because it more clearly discloses the decline in market value, and it does not distort the cost of goods sold. Her supervisor, financial vice-president Doug Brucki, prefers the direct method to write down inventory because it does not call attention to the decline in market value. What, if any, is the ethical issue involved? Is any stakeholder harmed if Brucki's preference is used? What should Vickie do?
2. Should companies manage fixed assets with the same level of rigor as inventory? Why or why not?
3. Field Company purchased a warehouse in a downtown district where land values are rapidly increasing. Adolph Phillips, controller, and Wilma Smith, financial vice president, are trying to allocate the cost of the purchase between the land and the building. Noting that depreciation can be taken only on the building, Phillips favors placing a very high proportion of the cost on the warehouse itself, thus reducing taxable income and income taxes. Smith, his supervisor, argues that the allocation should recognize the increasing value of the land, regardless of the depreciation potential of the warehouse. Besides, she says, net income is negatively impacted by additional depreciation and will cause the company's stock price to go down.
What stakeholder interests are in conflict? What ethical issues does Phillips face? How should these costs be allocated?
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