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Horngren'S Financial And Managerial Accounting
Found in: Page 906

Short Answer

In 100 words or fewer, explain the difference between product costs and period costs. In your explanation, explain the inventory accounts of a manufacturer.

Period cost are the operating expenses and the products costs are which incurred for manufacturing the product.

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Step by Step Solution

Step-by-Step SolutionStep 1: Definition of Manufacturing company

The manufacturing company is defined as the company which convert raw material into finished goods using labor, machinery and supplies.

Step 2: Difference between product costs and period costs

Period costs are operating costs which are expensed in the same accounting period in which they are incurred, on the other hand, the product costs are recorded as an asset and not expensed until the goods sold, then they are recorded as the expense known as cost of goods sold.

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Question: Applying ethical standards

Natalia Wallace is the new controller for Smart Software, Inc. which develops and sells education software. Shortly before the December 31 fiscal year-end, James Cauvet, the company president, asks Wallace how things look for the year-end numbers. He is not happy to learn that earnings growth may be below 13% for the first time in the company’s five-year history. Cauvet explains that financial analysts have again predicted a 13% earnings growth for the company and that he does not intend to disappoint them. He suggests that Wallace talk to the assistant controller, who can explain how the previous controller dealt with such situations. The assistant controller suggests the following strategies:

a. Persuade suppliers to postpone billing $13,000 in invoices until January 1.

b. Record as sales $115,000 in certain software awaiting sale that is held in a public warehouse.

c. Delay the year-end closing a few days into January of the next year so that some of the next year’s sales are included in this year’s sales.

d. Reduce the estimated Bad Debts Expense from 5% of Sales Revenue to 3%, given the company’s continued strong performance.

e. Postpone routine monthly maintenance expenditures from December to January.


1. Which of these suggested strategies are inconsistent with IMA standards?

2. How might these inconsistencies affect the company’s creditors and stockholders?

3. What should Wallace do if Cauvet insists that she follow all of these suggestions?


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