a) Why would reclassifying period as product cost increase this periods reported earning? Product cost include all cost incurred to make a product (direct labor and material and manufacturing overhead). They are initially assigned to an inventory account in the balance sheet until they are sold. Period cost on the other hand are non-product costs, such as admin and sales expenses. These are expensed in the year they are incurred in the income statement. The income statement reports earnings for a specific period or timeframe; and matches the sales revenue for that period against the relevant period cost. The greater your period costs, the smaller your earnings for that period, and vice versa. Therefore reclassifying period cost to product costs moves the costs from being an expense on the Income Statement to being part of the Balance Sheet. This will reduce the amount of expenses we are supposed to subtract from our revenue for that period, therefore showing higher earnings for the period.

b) Do you believe Gallant’s actions are ethical? Why or why not? Income statement’s depicts a company’s earnings for a period, to other business entities. For consistency and comparability the income statement should fallow GAAP standards. By manipulating and delaying cost that should be matched against the revenue they helped generate in the specific period, Gallant’s is engagement in unethical behavior because the inflated earnings they are trying to report is in a sense a false representation of their financial status. Even if the reclassifications fall within GAAP standards, the intent to deceive is unethical. Usually drastic changes in accounting practices warrant a degree of disclosure along with justifications. This seems like an attempt to look good to the market and potential investors. Additionally by delaying or postponing orders they have already