Discussion- Please give your opinion based on the article as well as cited work- Only Accounting Majors
The most common type of inventory related fraud is "inventory overstatement" according to Chris Hamilton, CPA, CFE, CVA, DABFA. The most effective way to inflate income is by overstating inventory, therebyunderstating the cost of goods sold. (Hamilton)
Beginning inventory + Purchases - Ending inventory = Cost of goods sold
Revenue - Cost of good sold = Net Income
So, if inventory is overstated or inflated, the Cost of goods sold will be lower, thereby subtracting less from Revenue. This will give an inflated Net Income, lending the appearance of higher profits/success.
Inventory manipulation and overstatement was the focus of an article I read about Wal-Mart. A Wal Mart store specifically in North Carolina was the focus of the article, but the issue seemed to permeate "the Wal Mart Empire".
"Most of the managers interviewed said that irregular accounting practices concealed shrinkage losses and were an effort-tolerated and even promoted by their superiors-to inflate the stated profitability of stores."(Woodman, 2014)
Cash Management
Cash Management refers to how the money (and financial resources) in a business flows; how it is accounted for, invested, and handled. Proper use and documentation of investor funds is critical for transparency and ethical accounting....and ultimately perpetual success. Retained earnings should be invested to help grow the business, rather than allowed to sit idly and not work for the company, producing revenue; however the appropriate balance of liquid cash on hand for anticipated needs is required to "...conduct business operations."(Williams)
References
Hamilton, C., CPE, CFE, CVA, DABFA. (n.d.). Inventory Fraud: Detecting, Preventing and Prosecuting. Retrieved July 18, 2016.
Williams, R. J. (2016). Financial and managerial accounting. New York: McGraw-Hill Irwin.
Woodman, S. (2014, June 11). Former Managers Allege Pervasive Inventory Fraud at Walmart. How Deep Does the Rot Go? Retrieved July 19, 2016, fromhttps://www.thenation.com/article/former-managers-allege-pervasive-inventory-fraud-walmart-how-deep-does-rot-go/