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ETHICS CASE: S R Marsh Wholesale LIFO pricing of inventory to lower income

S. R. Marsh Wholesale Corp. uses the LIFO method of inventory costing. In the current year, profit at S. R. Marsh is running unusually high. The corporate tax rate is also high this year, but it is scheduled to decline significantly next year. In an effort to lower the current year's net income and to take advantage of the changing income tax rate, the president of S. R. Marsh Wholesale instructs the plant accountant to recommend to the purchasing department a large purchase of inventory for delivery 3 days before the end of the year. The price of the inventory to be purchased has doubled during the year, and the purchase will represent a major portion of the ending inventory value.


(a) What is the effect of this transaction on this year's and next year's income statement and income tax expense? Why?

(b) If S. R. Marsh Wholesale had been using the FIFO method of inventory costing, would the president give the same directive?

(c) Should the plant accountant order the inventory purchase to lower income? What are the ethical implications of this order?

Solution Preview

Dear Student,

The company is using LIFO method of inventory accounting. The price of inventory has increased during the year.

Answer for

a) Given the LIFO method of accounting and the increase in the inventory price, by executing the president's directive the company will show less profit for this year and since the corporate tax is high, this year, the income tax payable ...

Solution Summary

The solution discusses LIFO versus FIFO for the pricing of inventory and the effect to net income and income taxes. The ethical considerations are compared to legal business discussions.