.K. Gallant is President of Kranbrack Corporation, a company whose stock is traded on a national exchange. In a meeting with investment analysis at the beginning of the year, Gallant had predicted that the company’s earnings would grow by 20% this year. Unfortunately, sales have been less than expected for the year, and Gallant concluded within two weeks of the end of the fiscal year that it would be impossible to ultimately report an increase in earnings as large as predicted unless some drastic action was taken. Accordingly, Gallant has ordered that whenever possible, expenditures should be postponed to the new-year-including cancelling or postponing orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-year advertising and travel. Additionally, Gallant ordered the company’s controller to carefully scrutinize all costs that are curre
.K. Gallant is President of Kranbrack Corporation, a company whose stock is traded on a national exchange. In a meeting with investment analysis at the beginning of the year, Gallant had predicted that the company’s earnings would grow by 20% this year. Unfortunately, sales have been less than expected for the year, and Gallant concluded within two weeks of the end of the fiscal year that it would be impossible to ultimately report an increase in earnings as large as predicted unless some drastic action was taken. Accordingly, Gallant has ordered that whenever possible, expenditures should be postponed to the new-year-including cancelling or postponing orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-year advertising and travel. Additionally, Gallant ordered the company’s controller to carefully scrutinize all costs that are curre
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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M.K. Gallant is President of Kranbrack Corporation, a company whose stock is traded on a national exchange. In a meeting with investment analysis at the beginning of the year, Gallant had predicted that the company’s earnings would grow by 20% this year. Unfortunately, sales have been less than expected for the year, and Gallant concluded within two weeks of the end of the fiscal year that it would be impossible to ultimately report an increase in earnings as large as predicted unless some drastic action was taken. Accordingly, Gallant has ordered that whenever possible, expenditures should be postponed to the new-year-including cancelling or postponing orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-year advertising and travel. Additionally, Gallant ordered the company’s controller to carefully scrutinize all costs that are currently classified as period costs and reclassify as many as possible as product costs. The company is expected to have substantial inventories at the end of the year.
Required:
- Why would reclassifying period costs as product costs increase this period’s reported earnings?
- Do you believe Gallant’s actions were ethical? Why or why not?
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