Financial Accounting: In an Economic Context

KEY TERMS

Note: Definitions for these terms are provided in the glossary at the end of the text.

Average assumption (p. 304)

Consignment (p. 294)

First-in, first-out (FIFO) assumption (p. 304)

FOB (free on board) destination (p. 295)

FOB (free on board) shipping point (p. 294)

Freight-in (p. 295)

Goods in transit (p. 294)

Inventory recovery (p.311)

Last-in, first-out (LIFO) assumption (p. 304)

LIFO conformity rule (p. 305)

LIFO liquidation (p. 305)

LIFO reserves (p. 309)

Manufacturing companies (p. 296)

Overhead (p. 296)

Paper profits (p. 307)

Periodic inventory method (p. 298)

Perpetual inventory method (p. 297)

Retail companies (p. 296)

Specific identification (p. 302)

Transportation-in (p. 295)

ETHICS in the Real World

It is well known that inventory fraud is an easy way for a company to produce instant profits and dress up the balance sheet. Many famous frauds have involved the creation of fictitious inventories.

An article in the Wall Street Journal reported that “auditors at even the top accounting firms are often fooled [by such shenanigans] … outside auditors can fail to catch inventory scams because they either trust management too much or fear they will lose clients by being tougher … spotting inventory fraud requires bigger staffs than some accounting firms … are willing to send out to do the inventory audits. … If auditors were more skeptical of management claims, particularly in bad times, they would look at a far greater portion of the inventory in certain instances ...