Kerrigan Corporation announced on November 1, 2021 that company's CEO has been terminated and that James McCabe will become the company's new CEO. Kerrigan has had decreasing income over the last several of years. McCabe will be responsible for improving Kerrigan's future performance. What earnings management technique will the company probably utilize as a result of hiring a new CEO? Question 30 options: a) Increase cookie jar reserves b) Big Bath c) Accelerate current period revenues into future periods d) Accelerating future period expenses into the current perio

Kerrigan Corporation announced on November 1, 2021 that company's CEO has been terminated and that James McCabe will become the company's new CEO. Kerrigan has had decreasing income over the last several of years. McCabe will be responsible for improving Kerrigan's future performance. What earnings management technique will the company probably utilize as a result of hiring a new CEO? Question 30 options: a) Increase cookie jar reserves b) Big Bath c) Accelerate current period revenues into future periods d) Accelerating future period expenses into the current perio

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter1: Introduction To Cost Management

Section: Chapter Questions

Problem 4E: Consider the following thoughts of a manager at the end of the companys third quarter: If I can...

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On November 14, Thorogood Enterprises announced that the public and acrimonious battle with its current CEO had been resolved. Under the terms of the deal, the CEO would step down from his position immediately. In exchange, he was given a generous severance package. Given the information below, calculate the cumulative abnormal return (CAR) around this announcement. Assume the company has an expected return equal to the market return. Graph and interpret your results.
Anton Blair is the manager of a medium-size company. A few years ago, Blair persuaded the owner to base a part of his compensation on the net income the company earns each year. Each December he estimates year-end financial figures in anticipation of the bonus he will receive. If the bonus is not as high as he would like, he offers several recommendations to the accountant for year-end adjustments. One of his favorite recommendations is for the controller to reduce the estimate of doubtful accounts. Required 1. What effect does lowering the estimate for doubtful accounts have on the income statement and balance sheet? 2. Do you believe Blair’s recommendation to adjust the allowance for doubtful accounts is within his rights as manager, or do you believe this action is an ethics violation? Justify your response. 3. What type of internal control(s) might be useful for this company in overseeing the manager’s recommendations for accounting changes?
Consider the following thoughts of a manager at the end of the company’s third quarter: If I can increase my reported profit by $2 million, the actual earning per share will exceed analysts’ expectations, and stock prices will increase. The stock options that I am holding will become more valuable. The extra income will also make me eligible to receive a significant bonus. With a son headed to college, it would be good if I could cash in some of these options to help pay his expenses. However, my Vice President of finance indicates that such an increase is unlikely. The projected profit for the fourth quarter will just about meet the expected earnings per share. There may be ways, though, that I can achieve the desired outcome. First, I can instruct all divisional managers that their preventive maintenance budgets are reduced by 25 percent for the fourth quarter. That should reduce maintenance expenses by approximately $1 million. Second, I can increase the estimated life of the…
Anton Blair is the manager of a medium-sized company. A few years ago, Blair persuaded the owner to base a part of his compensation on the net income the company earns each year. Each December he estimates year-end financial figures in anticipation of the bonus he will receive. If the bonus is not as high as he would like, he offers several recommendations to the accountant for year-end adjustments. One of his favorite recommendations is for the controller to reduce the estimate of doubtful accounts. 1. What effect does lowering the estimate for doubtful accounts have on the income statement and balance sheet? 2. Do you believe Blair's recommendation to adjust the allowance for doubtful accounts is within his rights as a manager, or do you believe this action is an ethics violation? Justify your response. 3. What type of internal control(s) might be useful for this company in overseeing the manager's recommendations for accounting changes?
On November 14, Thorogood Enterprises announced that the public and acrimonious battle with its current CEO had been resolved. Under the terms of the deal, the CEO would step down from his position immediately. In exchange, he was given a generous severance package. Given the information below, calculate the cumulative abnormal return (CAR) around this announcement. Assume the company has an expected return equal to the market return. (A negative value should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to 1 decimal place.) Date Market Return(%) CompanyReturn (%) Nov 7 1.0 .6 Nov 8 .8 .6 Nov 9 −.7 −.1 Nov 10 −.6 −.3 Nov 11 1.8 1.0 Nov 14 −.6 2.3 Nov 15 .1 .1 Nov 16 .9 1.2 Nov 17 .7 .8 Nov 18 −.7 .0 Nov 21 .8 .2
Reed Kohler is in his final year of employment as controller for Quality Sales Corporation: he hopes to retire next year. As a member of top management, Kohler participates in an attractive company bonus plan. The overall size of the bonus is a function of the firm's net income before bonus and income taxes - the larger the net income, the larger the bonus. Due to a slowdown in the economy due to Coronavirus, the company has encountered difficulty in managing its cash flow. The company auditors have recommended that the company change its inventory method from FIFO to LIFO . The change would cause a significant increase in the cost of goods sold for the year. Kohler thinks the company shouldn't switch to LIFO b/c its inventory quantities are too large. After expressing this opinion to the firm's treasurer, Kohler is stunned at the treasurer's reply "Reed, I can't believe that after all these years with the company, you put your personal interests ahead of the companies…
A new CEO takes control of Do-Da Industries to turn it around (to make it profitable). Based on market research she wants to focus on two specific product lines. By the end of the first year the company exceeded budgeted profits by 18%. The company’s controller knows his annual bonus depends on exceeding budgeted profit and that next year’s performance would unlikely be similar to this year’s. Profit must exceed budget by 10% before the controller’s bonus kicks in. The controller realizes he can accrue some of next year’s expenses and defer some of this year’s revenue while still exceeding this year’s budgeted profit by 10%. Required: Why would the controller want to defer revenues but accrue expenses? Is this ethical? Why?
Quattro Technologies, a hydraulic manufacturer in the aeronautics industry, has reported steadily increasing net income over the past few years. The company reported net income of $120 million in 2019 and $140 million in 2020. The stock is receiving increasing analyst attention because many investors expect the steady growth in net income to continue well into the future.One of the factors increasing sales is the superior warranty Quattro offers. Based on experience, warranty expense in 2021 should be around $40 million. However, in a recent executive meeting it was suggested that the CFO report a larger, more conservative, estimate of warranty expense of $50 million this year.Required:1. Can Quattro use warranty expense to manage its reported amount of net income?2. Assume net income before warranty expense is $210 million in 2021 and $210 million in 2022, and total warranty expense over the two years is $80 million. Calculate net income after warranty expense based on the suggestion…
The executive officers of Welsh Inc. have a performance based compensation plan.The performance criterion of this plan is linked to growth in earnings per share. Whenannual EPS growth is 10%, the executives of Welsh will earn 100% of the shares; ifgrowth is 15%, they earn 125%. If EPS growth, however, is lower than 8%, theexecutives receive no additional compensation.In 2020, Shelly Prince, the financial controller of Welsh, reviews year end estimatesof bad debt expense and warranty expense. She calculates EPS growth of 10%. Amember of the executive mentioned to her that the estimate of bad debt expensemight be decreased, increasing EPS growth to 15%. Shelly is not sure she shouldinclude this because she believes that the current bad debt expense is sound. She doesrecognize though, that a great deal of subjectivity was involved in its computation.Instructionsi. What, if any, is the ethical dilemma facing Shelly Prince? ii. Should Shelly’s knowledge of the compensation plan influence…
You have estimated the current-year EBITDA of Mallock Transportation for a potential buyer of the firm, and you have discovered that the CEO of Mallock, who owns 90% of the firm, is taking a salary that is at least $100,000 higher than the cost of an outsider that could be hired to run the firm. The CEO will retire upon the sale, and the firm expects no loss in revenue since clients have signed long-term contracts that will be difficult to cancel. You adjust EBITDA to account for the CEOs replacement. The adjustment is called: a. Fraud b. Business judgment c. Accounting under GAAP d. Normalizing EBITDA e. None of the above
The executive officers of Rouse Corporation have a performance-based compensation plan. The performance criteria of this plan is linked to growth in earnings per share. When annual EPS growth is 12%, the Rouse executives earn 100% of the shares; if growth is 16%, they earn 125%. If EPS growth is lower than 8%, the executives receive no additional compensation. In 2020, Joan Devers, the controller of Rouse, reviews year-end estimates of bad debt expense and warranty expense. She calculates the EPS growth at 15%. Kurt Adkins, a member of the executive group, remarks over lunch one day that the estimate of bad debt expense might be decreased, increasing EPS growth to 16.1%. Devers is not sure she should do this because she believes that the current estimate of bad debts is sound. On the other hand, she recognizes that a great deal of subjectivity is involved in the computation. Instructions Answer the following questions. a. What, if any, is the ethical dilemma for Devers? b. Should…
In 2022, the ABC Food company has total assets of $46,690,000, cash balance of $3,875,000, sales growth of -3% (-0.03), loss indicator of 1, CFO change indicator of 0. If the manager decides to invest $325,000, does she/he overinvest or underinvest? Based on the threshold of $60,000, do you have to conduct a further investigation and why?