A Merchandiser’s greatest expense is cost of goods sold. Cost of goods sold is calculated based on the different inventory costing method that is used by the company: FIFO, LIFO, Specific identification method, or weighted average cost method.
During the last month of the fiscal year, a company experienced extraordinarily good sales, and severely depleted its base stock of merchandise. Since the company accounts for inventory using LIFO, the controller realized that cost of goods sold will be reduced by an extraordinary amount, inflating net income. This effect will be increased by the fact that the purchasing department negotiated some very good prices on merchandise during the year. The controller decided that a last-minute inventory purchase, at current higher prices, was the answer to the problem, and asked the purchasing department to check the inventory files and stock up on as many items as possible to be sure that the company did not have to “liquidate the LIFO layers.”
Is this ethical? Explain your answer.