ACC 311 WORKSHOP 7.4 CASE STUDIES
Download Real World Case 9-7 Duckwall- ALCO Stores, Inc. operates general merchandise retail stores throughout the central portion of the U. S. The following disclosure notes were included in recent financial statements: Note 1. ( c) Inventories ( in part) In the fourth quarter of fiscal year 2011, the Company elected to change its method of account-ing for inventory to the first- in, first- out ( FIFO) method from the lastin, first- out ( LIFO) method. The Company believes the FIFO method is preferable to the LIFO method as it better matches the current value of inventory in the company’s balance sheet and provides a better matching of revenues and expenses. Note 2. Inventories ( in part) In the fourth quarter of fiscal 2011, the Company elected to change its method of accounting for inventory from LIFO to FIFO. The Company applied this change in method of inventory by retrospectively adjusting the prior years’ financial statements. Required: Why does GAAP require Duckwall- ALCO to retrospectively adjust prior periods’ financial statements for this type of accounting change? Ethics Case 9-11 Danville Bottlers is a wholesale beverage company. Danville uses the FIFO inventory method to determine the cost of its ending inventory. Ending inventory quantities are determined by a physical count. For the fiscal year-end June 30, 2013, ending inventory was originally determined to be $ 3,265,000. However, on July 17, 2013, John Howard, the company’s controller, discovered an error in the ending inventory count. He determined that the correct ending inventory amount should be $ 2,600,000. Danville is a privately owned corporation with significant financing provided by a local bank. The bank requires annual audited financial statements as a condition of the loan. By July 17, the auditors had completed their review of the financial statements that are scheduled to be issued on July 25. They did not discover the inventory error. John’s first reaction was to communicate his finding to the auditors and to revise the financial statements before they are issued. However, he knows that his and his fellow workers’ profit- sharing plans are based on annual pretax earnings and that if he revises the statements, everyone’s profit- sharing bonus will be significantly reduced. Required: