Income Manipulation – Nixon Wholesale. Nixon Wholesale Corp. uses the LIFO cost flow method. In the current year, profit at Nixon is running unusually high. The corporate tax rate is also high this year, but it is scheduled to decline significantly next year. In an effort to lower the current year’s net income and to take advantage of the changing income tax rate, the president of Nixon Wholesale instructs the plant accountant to recommend to the purchasing department a large purchase of inventory for delivery 3 days before the end of the year. The price of the inventory to be purchased has doubled during the year, and the purchase will represent a major portion of the ending inventory value. What is the effect of this transaction on this year’s and next year’s income statement and income tax expense? Why? If Nixon Wholesale had been using the FIFO method of inventory costing, would the president give the same directive? Should the plant accountant order the inventory purchase to lower income? What are the ethical implications of this order?
Introduction
In the world of accounting and finance, companies sometimes face ethical dilemmas when managing their financial statements and tax obligations. This paper examines a specific case involving Nixon Wholesale Corp. and their decision to manipulate income and take advantage of changing tax rates. We will explore the effects of this transaction on the income statements and income tax expenses for both the current and next year, consider the implications under the FIFO method, and discuss the ethical considerations at play.
Effect on Income Statements and Income Tax Expense
By making a large purchase of inventory just before the end of the year, Nixon Wholesale Corp. aims to decrease the current year’s net income. Since they use the LIFO (Last-In, First-Out) cost flow method, the purchase of inventory at a higher price will increase the cost of goods sold (COGS) and consequently reduce the reported net income for the current year. This, in turn, would lower the income tax expense for the current year, as it is calculated based on taxable income. In the following year, when the corporate tax rate is expected to decline significantly, the inflated COGS from the large inventory purchase will lead to a lower net income. As a result, the income tax expense for the next year will also be reduced, aligning with the decreased tax rate.
FIFO Method and the President’s Directive
Had Nixon Wholesale Corp. been using the FIFO (First-In, First-Out) method, the effect of the president’s directive would have been different. Under FIFO, the inventory would be assumed to be sold in the order it was purchased, so the older, lower-priced inventory would be matched with the cost of goods sold first. As a result, the large purchase of inventory at a doubled price would not impact the current year’s COGS significantly. The income statement and income tax expense would be less affected compared to the LIFO method. Income Manipulation – Nixon Wholesale.
Ethical Implications
The plant accountant faces an ethical dilemma in executing the president’s directive. Ordering the inventory solely to manipulate income raises serious ethical concerns. It can be seen as a deliberate attempt to deceive stakeholders and manipulate financial statements for personal gain. The ethical implications include potential damage to the company’s reputation, loss of trust from investors, and violation of professional standards. Accounting professionals are expected to uphold the principles of integrity, objectivity, and ethical behavior, prioritizing the accuracy and transparency of financial information. The accountant should consider the potential consequences of carrying out the directive, both personally and for the company as a whole. It is crucial to communicate the ethical concerns to higher management and explore alternative courses of action that align with ethical principles and financial integrity.
Conclusion
Income Manipulation – Nixon Wholesale. The case of Nixon Wholesale Corp. highlights the ethical challenges associated with income manipulation and taking advantage of changing tax rates. The president’s directive to order a large inventory purchase at an inflated price before the end of the year is an attempt to lower income and reduce tax obligations. However, this approach raises questions about the ethical integrity of the company’s financial reporting. Under the LIFO method, the directive would have a significant impact on income statements and income tax expenses for both the current and next year. In contrast, the impact would be less pronounced under the FIFO method. Regardless of the inventory costing method, the plant accountant should carefully consider the ethical implications of executing the directive and should strive to uphold professional standards and principles of integrity in financial reporting. In the pursuit of long-term success, companies must prioritize transparency, accuracy, and ethical behavior, ensuring that financial decisions are made in the best interest of all stakeholders while adhering to legal and professional standards. Use APA referencing style.