Milk Vita Case Summary

For this case, I am an auditor hired by the union representing Milk-Vita’s employees. I am being hired to prepare a report to analyze Milk-Vita’s December 31, 2017 financial statements and address a number of controversial issues regarding it. The union has asked me to evaluate the problems that are shown in some of the transactions of the 2017 financial statements. I am required to find the solutions of these problems, according to the union’s objectives. The reason I am hired by the union is to avoid job losses among the employees, in which the union will negotiate wages and benefits with Milk-Vita’s management. An objective for the union is income maximization and managing earnings to increase income to raise bonuses for the employees of

Periodic inventory control system is when the inventory isn’t adjusted whenever a transaction affects inventory. The amount of inventory is determined by counting it at the end of the period. The problem of this situation, is that they should've included the inventory count of the large order for the period. The reason for this is because the company does not recognize revenue until delivery. The company does not deliver the products until January 2nd 2018, which is after the fiscal period. At this point of time, all criteria of the revenue recognition criteria is met. Once the inventory is delivered, significant risk and rewards of ownerships are transferred from Milk-Vita to the customer. Milk-Vita has no involvement or control over the goods sold,as it is in the control of the customer. At this point collection of payment has been made by the customer, along with the amount of revenue can be measured. Lastly, the revenue recognition criteria is met as the cost of earning the revenue is known, as the cost of the goods sold for the customer are known. When the company does not include the large order in the year- end inventory count, it is perceived that the inventory is sold, which means the value of inventory is understated because they do not recognize the revenue for the inventory until the deliver happens which is in the next fiscal period. So technically, the company is not recognizing the revenue for the large order, but is recognizing the inventory sold for it, which is decreasing the value of the asset. By doing this, the company is understating their financial position on the financial statements. This is not good, as the union needs the well doing of the company to negotiate bonuses and raises for employees. By understating their financial position, the union cannot properly negotiate a fair increase in wages and bonuses of