Thompson Products produces plastic containers through a blow molding process. The com-pany uses process costing because its products are generally homogeneous and are produced in large batches.

Bradley Quito is the controller at Thompson Products. It is December 31, 2014, and Quito is supervising a physical count of all the inventory on hand. He knows it will be a tough year because of a sharp decline in sales near the end of the year.

In early December 2014, an earthquake struck in the southwestern Sichuan province in China. A major supplier of Thompson Products sustained considerable damage in the earthquake, preventing this supplier from delivering critical parts to Thompson Products in ­December. This shortage of raw materials has caused a decline in sales revenue for the last month in the year since production at Thompson Products has stalled due to the lack of the critical parts from this supplier. Thompson Products’ income will therefore be lower than pro-jected for 2014.

If annual income targets are not met, the company will not be paying bonuses to its em-ployees. Quito feels that this decline in sales revenue is a temporary situation due entirely to the earthquake. It appears likely that the supplier for these parts will be able to supply ­Thompson Products with all of the parts it needs by the end of February 2015.

As Quito is supervising the physical count on the last day of the year, he edits some inven-tory records to show more inventory items on the floor on December 31, 2014, than are actu-ally in inventory.

Quito justifies his action by thinking that the missed sales will actually be made up in ­January and February ( of 2015) when the supplier gets back on track with shipments. The decrease in sales revenue the company experienced in December is only a temporary timing difference. He is concerned that if bonuses are not paid to employees because of this timing difference, Thompson Products could lose some of its best employees to competitors that are offering higher wages. Thompson Products has always used the bonuses as a key component of its talent recruiting and retention strategy. Quito himself has verbally promised bonuses to key employees he has recruited during 2014, as have other managers.

Requirements

1. Using the IMA Statement of Ethical Professional Practice (refer to Exhibit 1– 6) as an ­ethical framework, answer the following questions:

a.What are the ethical issue(s) in this situation?

b. What are Quito’s responsibilities as a management accountant?

2. How would recording more units than are actually in inventory impact the 2014 balance sheet and income statement? How would it impact the 2015 balance sheet and income statement?

3. Discuss the specific steps Quito should take in this situation. Refer to the IMA Statement of Ethical Professional Practice in your response.