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    Accounting statements of the firm have inflated inventory

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    I have a problem to solve: I am the newly named CEO of a large Fortune 500 company. This company has been publicly traded on the NYSE for many years and is well known with the average investor. The company is currently having a difficult time with its earnings.

    I have discovered that the accounting statements of the firm have inflated inventory, thus making the firm look more profitable than it is. What is my next step?

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    Solution Preview

    No matter what you, as CEO, decide to do, it is a taught call. In most cases, when financial information is restated, the company's publicly traded stock will suffer on the market. For example, take Nortel Network - when the firm had to restate their financial information, the stock plummeted, causing havoc with investors.
    <br>Now, before you go public with the information that inventory was inflated there are very important internal audits that need to take place.
    <br>Firstly, a physical count of the inventory should take place to verify if the inventory was inflated or not. Once this is determined, I need to make sure that the same accounting principles were used now. There are a few methods of accounting for inventory - LIFO and FIFO being the two biggest ways. Perhaps FIFO (first in, first out) method was used before, and now you were using LIFO. In accounting, a very important principle is ...