Summary of the Scenario
The Chief Finance Officer at a public organization in Nashville is tasked with presenting the organization’s annual reports. To do that, he has to compile data for the organization’s assets and liabilities, and one of the targets is to lower the net income. The strategy he wants to employ is to classify inventory as fixed assets. The CFO has approached Paige Carter, the company’s Finance Controller, to conspire with her in misclassifying inventory as fixed assets. Paige Carter feels that is against her work ethics and is torn between breaching her code of conduct in the line of duty and safeguarding her job. Machinery, premises, and other organization properties are examples of fixed assets that an organization would have.
Benefits of Having Accurate Reports
The benefits of having accurate reports in any financial company range in building trust, identifying business opportunities, and expanding business. The use of accurate reports enables the CFO to know the business’s performance. Therefore, it aids investors, creditors, and shareholders plan what next move to take for that matter (Hill & Ruch, 2019). By having accurate business reports, a company can use data to expand, most importantly on key decisions that can bring new business. When there is accuracy in the financial business, the shareholders, creditors, and vendors entrust the CFO and the support staff with their resources, hence building high-quality trust.
Financial statements that are keenly and accurately recorded help a firm expand the business by spotting potential prospects, investors, and suppliers who can assist as the group will have a track record of the company’s financial performance (Easton, 2016). Through accurate financial reporting, mistakes and errors are reduced, preventing possible risks that a company may fall into (Elliott & Elliott, 2019). Accuracy in business reports helps during tax time when a company can produce compliance records during scrutiny, audit, or appraisals. From this analysis, Tommy Rich, the organization’s CFO, is going against the business law and puts carter in crossed hands.
Why Inventory Should not be Classified as Fixed Assets
Inventory is a current asset, and it should not be categorized as a fixed asset. It cannot be put in the category of fixed assets because it can be converted into money within a fiscal year (Easton, 2016).
Inventory can be referred to as stock, which means it is any item that can be sold for cash. Examples of inventory include goods that a company sells, cash at hand, and others. Fixed assets are things such as plants and equipment used by a business to generate revenue (Elliott & Elliott, 2019). They are reported as non-current assets in financial books, such as the balance sheet. Inventory cannot be recorded at a net value because the depreciation and disposal possibilities are highly possible. For example, when Tommy Rich classifies inventory as fixed assets, it is expected to last for a financial year, bringing loss for a company. Holding stock for a longer period is risky for organizations because it can tie up cash hence incurring carrying costs.
Disadvantages of Accurate Reporting
Accurate reporting involves spending time comparing, weighing, and analyzing data by a given organization’s personnel. Therefore, it means the process is prone to functional mistakes as human beings are associated with errors (Hill & Ruch, 2019). The major disadvantage of accurate reporting is that it is time-consuming because it requires different information sources from various departments.
There is a high cost in time and money in preparing accurate reports hence limiting the organization’s financial and logistical capability. The outcome of such limitation is that an organization will experience slow investment in operations, and expansion will be noted on a low note. When preparing reports, the financial controller aims at developing a quantitative report at the expense of qualitative metrics (Easton, 2016). Therefore, there are big chances that the company will ignore qualitative information hence bringing shortcomings to business operations. For example, organizations that hire high-qualified employees and self-motivated staff may not report that in the financial statements. That means the asset will be neglected and can be one reason why a company may have been outweighed temporarily in financial strengths.
Differences between Inventory and Fixed Assets
The period of time is different, with fixed assets taking long-term while inventory taking short-term periods. Inventory that is kept for a long time will risk the company’s financial costs. Another difference is the items and types of things the two assets contain (Easton, 2016).
There is tangibility for fixed assets and non-tangible assets such as trademarks and brand names. Inventory, in this case, is a stock of goods that are ready for selling and includes things like raw materials and supplies used for the goods. Risk factor also varies for two assets because inventory cannot be behold for a long time. On the other hand, fixed assets do not involve big risks like buildings; machinery is used for the entire business life (Hill & Ruch, 2019). Fixed assets usually depreciate on an annual basis, and the cost is calculated in every company’s enterprise. An inventory does depreciate; hence, it will not have the same cost.
Importance of Distinguishing Inventory from Fixed Assets
The company can assess the timing of financial transactions if it has a concrete sheet separate from the reports. Additionally, it shows the company’s items clearly, and there is an easy way to monitor and detect changes like discrepancies in the financial statements hence preventing possible constraints (Hill & Ruch, 2019). Listing the two assets in the different accounts provides valuable data to an organization’s shareholders by telling them the current value of the assets. For example, if the financial statements indicate that a company has assets worth $100,000, it means it is valuable for knowing the current position (Elliott & Elliott, 2019). However, telling the stakeholders that $30,000 of those assets are current will be more valuable as the stakeholders will know that the liabilities are expected to be paid within the fiscal year.
Recommendations on the Case Study
Tommy Rich and Paige Carter should not misclassify the inventory as fixed assets but currents. The rationale for that is that it will provide wrong and invaluable information to its stakeholders. Additionally, if inventory is classified as a fixed asset, it will be hard to detect cash flow from the stock. The organization will be at risk of having a financial downfall. Paige Carter should explain the benefits of classifying both assets separately so that Tommy Rich will make a fine decision concerning that matter.
Easton, P. (2016). Financial reporting: An enterprise operations perspective. Journal of Financial Reporting, 1(1), 143-151. Web.
Elliott, B., & Elliott, J. (2019). Financial accounting and reporting (19th ed.). Pearson Education Limited.
Hill, M., & Ruch, G. (2019). Financial reporting for employee stock options: The Importance of differentiating compensation from proceeds. Journal of Financial Reporting, 4(1), 93-116. Web.