5. One can argue that whether the “hat trick” is unethical depends on the
level of sophistication of the owners of the company and others who
read the financial statements. If they understand the effects of excess
production on net operating income and are not misled, it can be ar-
gued that the hat trick is ethical. However, if that were the case, there
does not seem to be any reason to use the hat trick. Why would the
owners want to tie up working capital in inventories just to artificially at-
tain a target net operating income for the period? And increasing the
rate of production toward the end of the year is likely to increase over-
head costs due to overtime and other costs. Building up inventories all
at once is very likely to be much more expensive than increasing the
rate of production uniformly throughout the year. In the case, we as-
Case 3-35 (45 minutes)
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