FIFO accounting

Jason Archer is the CEO of JCPenney (a U.S. retailer). Because Jason’s bonus is based on the company’s earnings, he has directed the controller to use FIFO as the inventory costing method. Jason did not tell the controller his real reason for the directive; instead, he stated that he thought FIFO better reflected the actual flow of inventory costs. Please review the following links and then answer the questions. • http://www.journalofaccountancy.com/Issues/2002/Jun/UseBest PracticesInExecutiveCompensationPlans.htm • http://www.ur.umich.edu/0304/Jan19_04/10.shtml • http://www.investopedia.com/articles/stocks/07/executive_ compensation.asp • http://ir.jcpenney.com/phoenix.zhtml?c=70528&p=irol-irHome • http://www.searsholdings.com/invest/financial_info.htm Questions 1. Jason’s decision to select FIFO appropriate? Is it ethical? Is Jason wrong if this will help the company and also benefit him too? 2. What are some of the pitfalls of a company basing a manager’s or CEO’s compensation on the company’s earnings? 3. Using the links provided for JCPenney and Sears (a U.S. retailer), determine the inventory turnover ratio for the companies. What does this ratio tell you about these companies? How do the companies compare? Using the links provided for JCPenney and Sears, calculate the number of days in inventory for the companies. What does this ratio tell you about these companies? How do the companies compare? Discussion Some TIPS!! sounds like companies can just change inventory costing methods whenever they want, which we know they can’t do. So don’t let that throw you off here, just assume for the time being that they can. The main issue on this Discussion is upper management making decisions that impact themselves as well as the company. So give some thought on the problems this might cause. And don’t forget to calculate the inventory turnover ratios for both Sears and Penney’s. Our readings give a formula for this calculation and you can also find the formula on the internet. There are really four questions that need to be answered for this Discussion. The formatting get messed up and there are only three numbered but the last two lines on Penney’s and Sears is really the fourth question. So be sure to answer all four