The CEO of Miller Enterprises has decided to increase production in the current year even though demand for its product has been stable for the last few years. The company is trying to attract outside investors, and the CEO feels the increased inventory on the balance sheet will help attract those investors. The CFO is concerned that the financial statements might be misleading because of the increased production.
Discuss why the GAAP requirement of using absorption costing in financial statements could lead to financial statements that may be misleading to potential investors. Do you think this is an ethical dilemma? If so, what would you suggest the company do to clarify the financial position of the company? If not, state your reasons.