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We don't seem to have enough administrative agencies. Can youthink of an agency that we could add? Be sure and give detailsabout the responsibilities and powers of this agency and why weneed it. (Feel free to use your imagination here.)

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Jamar Ferry
Jamar FerryLv2
28 Sep 2019

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CP 6-2 LIFO & Inventory flow

The following is an excerpt from a conversation between Paula Marlo, the warehouse manager for Musick Foods Wholesale Co., and its accountant, Mike Hayes. Musick Foods operates a large regional warehouse that supplies produce and other grocery products to grocery stores in smaller communities.

Paula: Mike, can you explain what's going on here with these monthly statements?

Mike: Sure, Paula. How can I help you? Paula: I don't understand this last-in, first-out inventory procedure. It just doesn't make sense.

Mike: Well, what it means is that we assume that the last goods we receive are the first ones sold. So the inventory consists of the items we purchased first.

Paula: Yes, but that's my problem. It doesn't work that way! We always distribute the oldest produce first. Some of that produce is perishable! We can't keep any of it very long or it'll spoil.

Mike: Paula, you don't understand. We only assume that the products we distribute are the last ones received. We don't actually have to distribute the goods in this way.

Paula: I always thought that accounting was supposed to show what really happened. It all sounds like "make believe" to me! Why not report what really happens?

Respond to Paula's concerns.

You are 4 months into a 6 month project. The project is linear,which means that the progress and spending occurs at a constantrate. Our crack project team of highly skilled associates hasworked diligently and put in extra hours to keep the project going.Our accounting department has provided the following data at theend of month 4:

Actual cost to date = $88,800

Planned expenditures to date = $101,000

The CFO is excited and has sent you an email congratulating you forbeing 12.07% under budget. However, is it really time to hold ateam celebration? That would be fun but your project managermentality kicks in. Those numbers look good but how are we‘really’ doing? To understand the true project performance, weneed to apply earned value techniques.

The missing piece we need is Earned Value (i.e. what we haveactually accomplished so far). You meet with your team and findthat only 6 of the 7 tasks scheduled to be complete by the end ofmonth 4 have actually been completed. Task 7 isn’t even started!This information gives you the final data you need to apply‘Earned Value’ and develop an objective analysis.

1. What are the PV, EV, and AC for the project at the end of month4?
2. What are the SV, CV, SPI, and CPI for the project?
3. Assess the project performance to date? Do you get to have thecelebration?

We have had Paige & Gentry as our auditors for many years,haven’t we, Jane? They have been here since I became president twoyears ago.” “Yes, Bob, I have been the Chief Financial Officer forseven years, and they were here before I came. Why do you ask?”“Well, they were really tough on us during the recent discussionswhen we were finalizing our year-end audited statements—not at alllike I was used to at my last company. When we asked for a littlelatitude, our auditors were usually pretty obliging. Frankly, I’m alittle worried.” “Why, Bob, we had nothing to hide?” “That’s true,Jane, but let’s look ahead. We’re going to have difficulty makingour forecast this year, and our bonuses are on the line. Remember,we renegotiated our salary/bonus package to give us a chance athigher incentives, and we have to be careful.” “Looking ahead,we’ve got a problem with obsolete inventory that’s sure to come torequire discussion for a second year in a row. We’ve got thewarranty problem with the electrical harness on midrange machinewhich is going to cost us a bundle, but we want to spread theimpact over the next three years when the customers discover theproblem and we have to fix it up. And don’t forget the contaminatedwaste spill we just had—how much is that going to cost to clean up,if we ever get caught?” “These are potentially big ticket items.Bill Paige, the guy who is in charge of our audit, is not going tolet these go by. He said the inventory problem was almost materialthis year and we had to argue really hard. You are a qualifiedaccountant; how can we handle this?” “Well, Bob, we could have someinformal discussions with other auditors—maybe even the ones atyour old company—to see how they would handle issues like these.The word will get around to Bill and he may be more accommodatingin the future, and will probably shave his proposed audit fee fornext year when he meets with our Audit Committee next month. If youreally wanted to play hardball, we could talk the Audit Committeeinto calling for tenders from new auditors. After all this time,it’s logical to check out the market, anyway. We would have advancediscussions during which we would sound them out on how they wouldassess materiality in our company’s case. Our audit fee in gettingpretty large—almost $50,000 this year—so some big firms will bereally interested.” “Jane, let’s play hardball. Get a list of auditfirms together for the tender process, and I will approach theAudit Committee. Be sure to list some small firms, includingWebster & Co., the firm auditing my old company.” Questions 1.Who are the major stakeholders involved in this situation? 2. Whatare the ethical issues involved? 3. Is this situation unethical?Why and why not? 4. What should Jane do if Webster & Co. lookslike the choice the Audit Committee will make and recommend to theboard of directors?

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