Question

Question: BTN 14-3 Assume that you are the managerial accountant at Infostore, a manufacturer of hard drives, CDs, and DVDs. Its reporting year-end is December 31. The chief financial officer is concerned about having enough cash to pay the expected income tax bill because of poor cash flow management. On November 15, the purchasing department purchased excess inventory of CD raw materials in anticipation of rapid growth of this product beginning in January. To decrease the company’s tax liability, the chief financial officer tells you to record the purchase of this inventory as part of supplies and expense it in the current year; this would decrease the company’s tax liability by increasing expenses.

Required

1. In which account should the purchase of CD raw materials be recorded?
2. How should you respond to this request by the chief financial officer?

Short answer

Answer

1. CD raw material will be reported in the inventory account.
2. Theaccountant must deny the request of the chief financial officer.

Step-by-step solution

Definition of Managerial Accounting

The branch of accounting concerned with the analysis and interpretation of the financial accounting information in such a way that it helps in taking business decisions is known as managerial accounting.

Account for recording the purchase of Raw material

The purchase of raw material for the CD must be recorded in the current asset account known as raw material inventory. This raw material is recorded as a current asset because it will generate an inflow of cash when converted into finished goods and sold to the customer.

Response to request

The accountant must deny the request made by the chief financial officer to record the raw material inventory and office supplies expenses to reduce the tax liability. This process will misstate the financial statement of the business entity and will also mislead the decisions of the external users.