Sec. 201-100 BYP 6-9 The effect of this transaction on this year?s income statement will show an increase in the cost of goods sold, which will end up showing a lower gross profit and net income due to the increase of purchases at the end of the year. The effect on next year?s income statement will also show a lower gross profit because they will start out with a larger beginning inventory than they would have. The effect on the income tax expense will cause it to be lower due to the increase of purchases. That makes gross profit decrease which in the end lowers net income and allows a lower income tax expense. If the company would have been using the FIFO method of inventory instead, I think the president would have not gave the same directive because under FIFO you are already showing that your company has a higher income and it shows that you have a lower cost of goods sold which makes gross profit higher. If a company wanted to have less tax expense then they would be using LIFO in the first place. So with that said, I don?t think they would do the same thing to lower taxes. I don?t think that the plant accountant should put in the order because that would not be showing the company?s true net income. I don?t think that this situation is even that bad because they are purchasing inventory and there?s nothing against a company wanting to stock up on inventory at the end of an accounting period. On the other hand it would be unethical to just write down that you purchased inventory when you really didn?t. I still don?t think that he should put in the order because it doesn?t show their true income because they are purchasing inventory that they don?t need.
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