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Failing to Report Inventory at the Lower of Cost or Market [LO 7-4]
| David H. Brooks, a university graduate with an accounting degree and the former CEO of MYD Industries, Inc., was charged in October 2007 with accounting and securities fraud for failing to report the company’s inventory at the lower of cost or market. From 2001 to 2005, MYD purchased large quantities of a material called Zylon and used it in making bulletproof vests that were sold to the U.S. military and local law enforcement agencies. During this same period, MYD learned that Zylon deteriorated rapidly when exposed to light, heat, and body perspiration. MYD knew that one of its competitors, Second Chance Body Armor, had stopped using Zylon in its vests and, eventually, discontinued its business because customer demand for its Zylon-based vests had evaporated. MYD did not write down its own inventory of Zylon and Zylon-based vests because it had a large contract to supply the U.S. military with bulletproof vests. In its financial statements for the year ended December 31, 2004, MYD reported inventories of $89 million, sales of $103 million, net income of $19.4 million, but no inventory write-down. Yet, only eight months later, MYD admitted it should have written down its inventory by $30.3 million. |
| Required: |
| 1-a. | Complete the table below, indicating the account, amount, and direction of the effect (+ for increase and − for decrease) for the inventory write-down on the accounting equation.(Enter your answers in millions, (i.e., 5,500,000 should be entered as 5.5). Enter any decreases to account balances with a minus sign.) |
Expert Answer
Written down of inventory value has impact on Profir & Loss account and Balance Sheet. If inventory value has lower than Inventory and Income value will be lower.
Impact of written down value of inventory is tabled below;
