Julie Robertson recently went to work for K & K Enterprises as the accounting manager. At the end of the year, Jeffrey Baker, the CEO, called Julie into his office for a meeting. Mr. Baker explained to Julie that K & K Enterprises was in the midst of obtaining a substantial investment of cash by a major investor. Mr. Baker explained that he was concerned that the investor would decide not to invest in K & K Enterprises when it saw the current year’s results of operations. Mr. Baker then asked Julie to revise the current year’s financial statements by increasing the value of the ending inventory in order to decrease cost of goods sold and increase net income. Mr. Baker tried to reassure Julie by explaining that the company is under-taking a new advertising campaign that will result in a significant improvement in the company’s income in the following year. Julie is concerned about the future of her job, as well as others within the company, if the company does not receive the investment of cash.
Requirements
1. What would you do if you were in Julie’s position?
2. If Julie increases the value of the current year’s ending inventory, what will be the effect on the following year’s net income?