An electronics store has a large number of computers in its inventory that use outdated technology....

Question

An electronics store has a large number of computers in its inventory that use outdated technology. These computers are reported at their cost. Shortly after the December 31 year-end, the store manager insists that the computers can be sold for well over their cost. But the store's accountant has been told by the sales staff that it will be difficult to sell these computers for more than half of their inventory cost.

Required:
1. Why is the store manager reluctant to admit that these computers have little sales value?
2. What are the consequences for the business of failing to recognize the decline in value?
3. What are the consequences for the accountant of participating in a misrepresentation of the inventory's value?

Robert · Accepted Answer

1. The stores manager is reluctant in admitting the low sales value of computers for the 
following reason: 
a. Overstatement of closing inventory leads in overstatement of assets on the balance sheet. 
Besides, it also understates cost of goods sold, leading to overstatement of net income. Thus it is 
clear intention of over reporting of profits. 
b. The manager does not intend to report the loss as a result of reduction in sale value in the 
period of fall, instead would report the loss at future period, by slashing the prices of all the 
unsold units at one go and sell them, resulting in cooking the books.
2. Consequences to be faced by company for misrepresentation of inventory value:

An electronics store has a large number of computers in its inventory that use outdated technology. These computers are reported at their cost. Shortly after the December 31 year-end, the store...

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