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University of California, Santa BarbaraECON 274 Mr Gallant is president of Kranbrack Corporation, a company whose stock is traded on a national exchange

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University of California, Santa BarbaraECON 274

Mr Gallant is president of Kranbrack Corporation, a company whose stock is traded on a national exchange. In a meeting with investment analysts at the beginning of the year, Gallant had predicted that the company's earnings would grow by 20% this year. Unfortunately, sales have been less than expected for the year and Gallant concluded within two weeks of the end of the fiscal year that it would be impossible to ultimately repot an increase in earnings as large as predicted unless some drastic action was taken. Accordingly, Gallant has ordered that wherever possible, expenditures should be postponed to the new year- including canceling or postponing order with suppliers, delaying planned maintenance and training, and cutting back on end-of-year advertising and traveling. Gallant ordered the company's controller to carefully scrutinize all costs that are currently classified as period costs and reclassify as many as possible as product costs. The company is expect to have substantial inventories of work in process and finished goods at the end of the year.

A. Why would reclassifying period costs as product costs increase this period's reported earnings?

B. Would the reclassification change next years profit?

C. Do you believe Mr. Gallant's actions are ethical? Briefly explain.