Inventory
The sales order by The Executive Woman cannot be recorded because it does not meet SEC guidelines. According to the SEC, some arrangements must be met before sales revenue is recognized. SEC states, “Persuasive evidence of an arrangement exists, a product or service has been delivered, the seller’s price to the buyer is fixed or determinable, and collectability is reasonably ensured.” Therefore, Lady, Inc. must comply with these guidelines from the SEC when recognizing sales. Recording the sales ordered by The Executive Woman will increase Lady’s profitability in 2014, even though the information will not show an accurate and fair view of the firm’s operational results; net income will be overstated by 13%.
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The profitability in 2015 will decrease because the cost of sales recognized in 2014 will be charged to the income statement in 2015. In a perpetual inventory system, the cost of goods sold is accumulated as sales are made, and costs are transferred from the inventory account to the cost of goods sold account (Kaplan, 2015). Remember, Lutz directed the inventory control department not to separate the goods from inventory until January 1, 2015; this means that the cost of sales will not be transferred from the inventory to the cost of sales account until that date. Additionally, sales recorded on December 31, 2014, were to be recognized in 2015; this means that the sales for 2015 will be understated. As a result, the firm’s overall profitability will decrease in 2015 (Adler, 2013).
Lutz’s actions are unethical because the instruction she issued to the control does not comply with the revenue recognition principle stipulated by the SEC. Her actions will also affect the value of the ending inventory for the year 2014.
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References
Adler, R. (2013). Management Accounting. Routledge.
Kaplan, R. S. (2015). Advanced Management Accounting. PHI Learning.
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Question 
Session 3 Discussion
Ethical Dilemma: Inventories and Income Determination
Case 7 in Chapter 6 is titled “Ethical Dilemma: Inventories, Income Determination, and Ethics.”
Inventory
Read the case and then respond to the three questions. After posting your initial response, interact with two classmates during the week.
The textbook reading is from
- Financial and Managerial Accounting 10th Edition by Belverd E. Needles, Martin Powers, and Susan V Crosson