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    Effects of accounting transactions on incoe and taxible resu

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    In your team's investigation of Fitness Solutions, your interviews with current and past employees and an initial review of the accounting books reveal the following events:

    Fitness Solutions constantly overstates purchases to produce high cost of sales and lower net income for income tax purposes.
    Last year, Fitness Solutions changed from LIFO inventory method to FIFO method. The change most directly affects inventory balances and income taxes.
    There is evidence that at year-end last year, Fitness Solutions delayed the purchase of inventory until after year-end to keep cost of sales from being too large. The lower costs of sales result in higher net income for the year.
    This quarter, you have evidence that suggests Fitness Solutions records obsolete goods (i.e., goods that have been transported to a customer warehouse but refused) as sales.
    Fitness Solutions records costs related to developing a customer base as a prepaid assets (instead of expenses).
    Choose 2 of the above situations in accounting and determine whether they are ethical or unethical - also indicate how you defined ethical vs. unethical. Does ethical equate with legal? Why or why not? Identify the effects on the financial statements and if you believe the events reflect errors or deliberate fraud by Fitness Solutions.

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    Solution Preview

    In determining fraud or error, consider the motivation and effect of what is being ...

    Solution Summary

    This problem anaylzes the effects of various accounting transactions of net income and tax liability, and whether these transactions are acceptable, error or fraud.

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