How to spot phantom inventory

Assignment Help Financial Accounting
Reference no: EM131146325

Discussion- Please give your opinion to the information in the article and use cited references

There are many ways that a company can manipulate inventory information reported on their balance sheet in order to make the business appear financially healthy. A company can do this by overstating merchandise including "ghost" goods that don't exist, changing the actual counts, not recording purchases, and capitalizing inventory, all to make the business seem in better shape than it is in reality.

The Phar-Mor Pharmacy chain is a perfect example. Mickey Monus started the Phar-Mor national chain of drug stores from one drug store he bought in Youngstown, Ohio. He was able to take a failing store and, by using inflated inventory numbers, increase its profits on paper. He presented the false financial information to investors and fooled them into providing capital so he could open more stores. He had the idea that by offering deep discounts on merchandise to customers, his stores would be successful, but unfortunately, selling goods for less than he paid for them was not a good business plan. Monus pressured his staff to participate in the fraud and kept two sets of books, the real ones, and the ones that were doctored up to be shown to the auditors. His downfall was investing Phar-Mor's money into a basketball team that no one wanted to see. As his investment in the team failed, he pumped more of Phar-Mor's money into it. An observant travel agent working for the team wondered why Phar-Mor was paying for the team's travel expenses. She happened to be friends with one of Phar-Mor's investors and brought it to their attention. An investigation ensued and that was the end of Monus's empire. The accounting firm that worked for Phar-Mor ended up up paying big fines for not catching on to the fraud.

Managers need to know about inventory and receivable fraud because they are responsible for the day-to-day running the business. They use net sales as an indicator of how the business is doing and how it will perform in the future. Increasing inventory sales probably means larger profits in the future. If sales are declining, it may be a sign of financial difficulties ahead. If inventory numbers are incorrect, the financial health of the company can't be accurately determined.

Cash management is the concept of planning, controlling, and accounting of all financial resources, specifically cash transactions and cash balances. It entails keeping accurate records, reducing losses from fraud, knowing when to borrow money, and how much cash to keep on hand. If you have too little cash on hand, you won't have enough to operate the business. If you keep too much cash around and you don't invest it, you lose out on revenues it could be making for you.

Williams (2016) Financial & Managerial Accounting. McGraw-Hill Education.

Wells, J. (2001, June 1) Ghost Goods: How to Spot Phantom Inventory. Journal of Accountancy. Retrieved July 20, 2016 fromhttp://www.journalofaccountancy.com/issues/2001/jun/ghostgoodshowtospotphantominventory.html

Reference no: EM131146325

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