Lisa Martin was promoted to the position of controller as IRCS.
IRCS saw an opportunity to acquire POS systems at a discount from traditional market prices, yet IRCS did not have sufficient funds which made them get a loan for 10 million . ‘RCS is required to maintain a a coverage ratio of 3, or else it would violate the loan covenant and would have to repay the loan immediately. IRCS must provide monthly financial statements in accordance with GAAP. Lisa Martin conducted an inventory impairment test to determine whether inventories were correctly reported t lower of cost or market. ?? The impartment test performed by Martin calculated a loss of $538,005 due to three slow-moving CPU items.With the loss in mind, Martin thought about the idea of still selling the items at their cost, yet Scott confirmed that they would have to offer them at discount. Impairment loss will cause the company to violate thee interest coverage ratio debt covenant.
Lang asked Martin to find a way in order to stop the loss, he did not care if they performed unethical activities.Lang provided an update to Martin with an order from one of their customers, however, the information provided was not ethical as some of the items were below market values. Martin found out from Scott that that they were able to obtain a premium for by giving discounts on other items, however, Harvey asked for the information to be confidential and not to informed any accountant. ASC- 330-10-35-10 states that lower-of-cost-or-market should be apply to the inventory when there is only one end product and when inventory items are balanced.Martin knew that their inventory is on an item by item basis. ASC also states that the impairment test must be applied consistently from year to year. Edmonds asked martin to perform lower-of-cost-or market rule to all the inventory. Martin did so and found out that there was no need to record a loss.
Facts to know Issue Martin determined that she should compare the impairment test at individual item level, resulting in a loss of $538,005. Martin was asked to find a way, ethical or unethical to avoid the loss.Choices Follow the orders of CEO and CFO and find any unethical way to avoid the loss, resulting in a violation of her CPA standards. Compute the impairment test at inventory basis as ordered per Edmonds. Be ethical, knowing there is hidden information and following the ASC should report the impairment test as previous years: at individual item level. Avoid any problems and quit. Impairment test resulted in a loss of $538,005.
Martin knew management accounting practices may be inappropriate and unethical. ? Martin felt pressured by management since she was asked to find a way to avoid the loss. Possible Solutions Per the CPA ethical standards – 501-5: “negligence in the preparation of financial statements or record: permits or directs another to make, materially misleading entries in the financial statements or records of an entity.
” Since Martin knows that management activities are unethical and misleading she would violate her CPA ethical standards, knowing so she should not accept what management is asking her o do and report the inventory at individual item basis as outlined in the ASC.ARB NO. 43: may require that inventory be reported at less than cost, the cost principle and revenue recognition principle prevent the reporting of inventory at more than cost. With this in mind, the way Edmonds is asking Martin to report in some way or the other, the prices are being inflated, reason why there is no loss as compared when computing the test at individual item basis, so Martin should not report it as inventory level.