Dolgo Bontai, the COO of Rhekep Ltd, has recently reviewed the operations
Of the company, and concerned about the continued weak profit
Performance of the company. The company board has constantly stressed
The need for the company to improve its profits. Otherwise, the company will
Not be able to sustain the confidence of its shareholders and creditors. It is
Now a couple weeks before the end of the year, and hence it is almost certain
That the company will record another low profit at the end of the year. Dolgo
Knows that as a consequence of this low profit performance the company
Will have difficulty in refinancing some loans and will be pushed to pay
Higher interest rates. This will increase the financial burden of the company.
Dolgo realises that it is way too late for operations to increase profits for the
Year. However, he has come up with a plan, which in his opinion, will enable
The company to increase the reported profit for that year. He mentions the
Fact that the prices of inventory have been failing in recent weeks, and thus
He suggests for the company to purchase large amounts of inventory in the
Remaining two weeks of the year, and uses the LIFO methods for valuing and
Reporting inventories for that year.
As the junior but talented junior accountant, you are asked by the CEO,
Siganu Gayawela, about Dolgo's suggestion. Siganu particularly wants to
Know:
(a) whether Dolgo's plan will enable the company to report higher profit
For the year;
(b) the positive and negative consequences of the proposed plan for the
Company and shareholders; and
(c) whether the plan complies with accounting standards.
