Weasly Smith is the CEO of Big Corporation. At the end of 1998, Weasly was worried that Big Corporation would not be able to get a much needed loan because their debt to assets ratio was very high. To better the ratio, Weasly had the inventory counters "inflate" the number of units of ending inventory by 300,000 units. The company uses periodic weighted average valuation for the inventory. At the end of 1998, the average unit cost was $46 per item. The actual number of units they had was 1,700,000. The firm got its loan in 1999.
At the end of 1999, the inventory counters correctly counted ending inventory at 2,300,000 units. Inventory prices have been rising. To take advantage of this, Weasly wants to switch inventory methods so that the amount of assets would be high. During the year, the company purchased 500,000 units at $50 each, and 3,000,000 units at $60 each.
Answer the following:
a) What inventory method should Big Corporation use to give the highest value to its 1999 ending inventory? Perform the calculations and show the ending inventory cost under that method AND under the average method for 1999.
b) Is this switch ethical? Why or why not?
c) What is the effect (both in dollars and in what items) on both the 1998 and 1999 income statements and balance sheets of the "error" in inventory count in 1998? Was this "error" ethical? Why or why not?