Memo for Small Toy

From:

To:

Subject: concerns about the overstatement of inventory

Date

After the conversation we had last time about the inventory issue, I further took a look at the financial report and considered about your assumption. I appreciate the way you evaluate the data; but I believe that the overstatement of the inventory will generate a negative impact on the financial report, thus affect the welfare of the company. Here I highly recommend correcting the ending inventory in 2010 to best justify the company performance.

Although you mentioned the error found in the ending inventory corrected itself, According to GAAP standards, the overstated $1 million amount will actually cause a profit variation. The incorrect inventory balance will lead to an error in the calculation of cost of goods sold, therefore the gross profit and net income will all be affected too. As the 2011 ending inventory stays the same, the overstating inventory will cause an increase net income which will incorrectly exaggerate our profit.

Since financial statement users depend on accurate statements, care must be taken to ensure that the inventory balance at the end of each accounting period is correct. Otherwise it will reflect an unethical side Small Toys, which is a huge impact to our shareholders, partners, and customers who have trust us in the quality of the service provided by professionals. Because of these high expectations, we have to adopt the codes of ethics to maintain a high level of self-discipline that goes beyond the requirements of laws and regulations.

As the controller of Small Toys, I value my work based on my responsibility to Small Toys, and I hope you can consider my suggestions to revise the financial report for the benefit of the company. I believe with my expertise in accounting background, I am making the right suggestions to you. I hope our company will present the correct performance it should have, and it will achieve to a higher level in the...