M. K. Smith is president of Kranbrack Corporation, a company whose stock is traded on a national exchange.
In a meeting with investment analysts at the beginning of the year, Smith had predicted that the company's earnings would grow by 20% this year.
Unfortunately, sales have been less than expected for the year, and Smith 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, Smith has ordered that wherever 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, Smith 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 or work in process and finished goods at the end of the year.
Required:
a) Why would reclassifying period costs and product costs increase this period's reporting earnings?
b) Do you believe Smith's actions are ethical?
1. Why?
2. Why not?
c) Explain and elaborate in deal how this relates to the IMA Statement of Ethical Professional Practice? Give examples.