Ethical Implications of Reclassifying Costs to Boost Earnings: A Case Study of Kranbrack Corporation

1. Reclassifying period costs as product costs could increase this period's reported earnings because product costs are typically capitalized as part of the cost of inventory and are recognized as expenses when the inventory is sold. By reclassifying the costs from period costs to product costs, the expenses associated with these costs would be deferred and recognized over a longer period of time. This would result in lower expenses in the current period and higher reported earnings.

2. Whether Gallant's actions are considered ethical or not can be subjective and dependent on various factors. Some arguments against the ethics of the actions taken by Gallant could include:

a. Misrepresentation of financial statements: Reclassifying costs to manipulate earnings may lead to a misrepresentation of the company's financial position and performance to stakeholders, such as investors and analysts.

b. Violation of accounting principles: Reclassifying costs in a way that does not accurately reflect their nature or purpose may violate generally accepted accounting principles, which are designed to ensure transparency and consistency in financial reporting.

c. Lack of transparency and integrity: Gallant's actions may undermine the transparency and integrity of the financial reporting process by intentionally manipulating financial results to meet personal or company goals.

On the other hand, some arguments in favor of the ethics of Gallant's actions could include:

a. Business survival: Gallant may argue that the drastic actions taken were necessary to ensure the company's survival in the short term. By postponing expenditures and increasing reported earnings, the company may be better positioned to address its financial challenges and continue operations.

b. Fiduciary duty: As the president of the company, Gallant may argue that he has a fiduciary duty to act in the best interest of the shareholders. Taking actions to improve reported earnings may be seen as fulfilling this duty, even if it involves temporary or unconventional measures.

Ultimately, the ethics of Gallant's actions can be subjective and may depend on the specific circumstances, legal requirements, and the perspectives of different stakeholders.