transfer some land that I own into the company's name, and that will beef up our balance sheet. Garry can you shave P500,000 from expenses? Then we can probably get the bank loan that we need." Garry Santos, company chief accountant: "Mark, you are asking too much. Accounting principles are designed to keep this sort of thing from happening." Required: 1. What is the fundamental ethical issue in this situation? 2. Discuss how the company president's proposals violate accounting principles.

transfer some land that I own into the company's name, and that will beef up our balance sheet. Garry can you shave P500,000 from expenses? Then we can probably get the bank loan that we need." Garry Santos, company chief accountant: "Mark, you are asking too much. Accounting principles are designed to keep this sort of thing from happening." Required: 1. What is the fundamental ethical issue in this situation? 2. Discuss how the company president's proposals violate accounting principles.

Financial & Managerial Accounting

14th Edition

ISBN:9781337119207

Author:Carl Warren, James M. Reeve, Jonathan Duchac

Publisher:Carl Warren, James M. Reeve, Jonathan Duchac

Chapter13: Statement Of Cash Flows

Section: Chapter Questions

Problem 13.1TIF

See similar textbooks

Similar questions

CHALLENGE PROBLEM This problem challenges you to apply your cumulative accounting knowledge to move a step beyond the material in the chapter. The results of the operating activities of Kobe Company for the current year are as follows: Based on these results, Kobe is considering discontinuing department C and establishing a new department D. The estimated revenues and expenses of the new department are as follows: In addition, the proposed change will cause total indirect operating expenses to increase by 22,000. REQUIRED Determine whether Kobe should discontinue department C and establish department D.
Applying ethical standards, management accountability Ava Borzi is the new controller for Halo Software, Inc. which develops and sells education software. Shortly before the December 31 fiscal year-end, Jeremy Busch, the company president, asks Borzi how things look for the year-end numbers. He is not happy to learn that earnings growth may be below 9% for the first time in the company’s five-year history. Busch explains that financial analysts have again predicted a 9% earnings growth for the company and that he does not intend to disappoint them. He suggests that Borzi talks to the assistant controller, who can explain how the previous controller dealt with such situations. The assistant controller suggests the following strategies: Persuade suppliers to postpone billing $18,000 in invoices until January 1. Record as sales $120,000 in certain software awaiting sale that is held in a public warehouse. Delay the year-end closing a few days into January of the next year so that some of…
Applying ethical standards, management accountability Ava Borzi is the new controller for Halo Software, Inc. which develops and sells education software. Shortly before the December 31 fiscal year-end, Jeremy Busch, the company president, asks Borzi how things look for the year-end numbers. He is not happy to learn that earnings growth may be below 9% for the first time in the company’s five-year history. Busch explains that financial analysts have again predicted a 9% earnings growth for the company and that he does not intend to disappoint them. He suggests that Borzi talk to the assistant controller, who can explain how the previous controller dealt with such situations. The assistant controller suggests the following strategies: a. Persuade suppliers to postpone billing $18,000 in invoices until January 1. b. Record as sales $120,000 in certain software awaiting sale that is held in a public warehouse. c. Delay the year-end closing a few days into January of the next year so that…
Applying ethical standards, management accountability Natalia Wallace is the new controller for Smart Software, Inc. which develops and sells education software. Shortly before the December 31 fiscal year-end, James Cauvet, the company president, asks Wallace how things look for the year-end numbers. He is not happy to learn that earnings growth may be below 13% for the first time in the company’s five-year history. Cauvet explains that financial analysts have again predicted a 13% earnings growth for the company and that he does not intend to disappoint them. He suggests that Wallace talk to the assistant controller, who can explain how the previous controller dealt with such situations. The assistant controller suggests the following strategies: Persuade suppliers to postpone billing $13,000 in invoices until January 1. Record as sales $115,000 in certain software awaiting sale that is held in a public warehouse. Delay the year-end closing a few days into January of the next year so…
Applying ethical standards, management accountability Natalia Wallace is the new controller for Smart Software, Inc. which develops and sells education software. Shortly before the December 31 fiscal year-end, James Cauvet, the company president, asks Wallace how things look for the year-end numbers. He is not happy to learn that earnings growth may be below 13% for the first time in the company’s five-year history. Cauvet explains that financial analysts have again predicted a 13% earnings growth for the company and that he does not intend to disappoint them. He suggests that Wallace talk to the assistant controller, who can explain how the previous controller dealt with such situations. The assistant controller suggests the following strategies: a. Persuade suppliers to postpone billing $13,000 in invoices until January 1. b. Record as sales $115,000 in certain software awaiting sale that is held in a public warehouse. c. Delay the year-end closing a few days into January of the next…
Ethics and the Manager M. K. Gallant is president of Kranbrack Corporation, a company whose stock is traded on a national exchange. In a meeting with investment analysts at the beginning of the year, Gallant had predicted that the company’s earnings would grow by 20% this year. Unfortunately, sales have been less than expected for the year, and Gallant concluded within two weeks of the end of the fiscal year that it would be impossible to report an increase in earnings as large as predicted unless some drastic action was taken. Accordingly, Gallant has ordered that wherever possible, expenditures should be postponed to the new year—including canceling or postponing orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-year advertising and travel. Additionally, Gallant ordered the company’s controller to carefully scrutinize all costs that are currently classified as period costs and reclassify as many as possible as product costs that are…
Financial Difficulty: The “Going-Concern” Problem. Pitts Company has experienced significant financial difficulty. Current liabilities exceed current assets by $1 million, cash has decreased to $10,000, the interest on the long-term debt has not been paid, and a customer has brought a lawsuit against Pitts for $500,000 on a product liability claim. Significantquestions concerning the going-concern status of the company exist. The lawsuit and information about the going-concern status have been appropriately described in footnote 3 to the financial statements.Required:a. Draft AOW’s report, assuming that the auditors decide that an unmodified opinion instead of a disclaimer of opinion is appropriate in the circumstances.b. Draft AOW’s report, assuming that the auditors decide the uncertainties are so serious that they do not wish to express an opinion on Pitts’ financial statements
ETHICS (Rule-Making Issues) When the FASB issues new pronouncements, the implementation date is usually12 months from date of issuance, with early implementation encouraged. Karen Weller, controller, discusses with her financialvice president the need for early implementation of a rule that would result in a fairer presentation of the company’s financialcondition and earnings. When the financial vice president determines that early implementation of the rule will adversely affectthe reported net income for the year, he discourages Weller from implementing the rule until it is required. InstructionsAnswer the following questions.(a) What, if any, is the ethical issue involved in this case?(b) Is the financial vice president acting improperly or immorally?(c) What does Weller have to gain by advocacy of early implementation?(d) Which stakeholders might be affected by the decision against early implementation?
(Earnings Management) Charlie Brown, controller for Kelly Corporation, is preparing the company’s income statement at year-end. He notes that the company lost a considerable sum on the sale of some equipment it had decided to replace. Since the company has sold equipment routinely in the past, Brown knows the losses cannot be reported as an unusual item. Healso does not want to highlight it as a material loss since he feels that will reflect poorly on him and the company. He reasons that if the company had recorded more depreciation during the assets’ lives, the losses would not be so great. Since depreciation is included among the company’s operating expenses, he wants to report the losses along with the company’s expenses, where he hopes it will not be noticed. Instructions(a) What are the ethical issues involved?(b) What should Brown do?
Question 3 A company has just been taken over by new management that believes it can raise earnings before taxes (EBT) from $600 to $1,100, merely by cutting overtime pay and reducing cost of goods sold. Prior to the change, the following data applied: Total assets 7,500 Debt ratio 40% Tax rate 40% BEP ratio 13.31% EBT 600 Sales 10,000 These data have been constant for several years, and all income is paid out as dividends. Sales, the tax rate, and the balance sheet will remain constant. What is the company’s cost of debt?
ToshIba, EY (LO 1, 2, 3) In 2015, the business press reported that Japan’s Toshiba Corp. over stated its operating profit by 151.8 billion yen ($1.22 billion) over several years through accounting irregularities involving top management. This overstatement represents approximately one-third of Toshiba’s pre-tax profits during the misstatement period. Toshiba had a corporate culture in which one could not go against the wishes of superiors. An investigation report noted that when top management presented ‘challenges’, division presidents, line managers and employees below them continually carried our inappropriate accounting practices to meet targets in line with the wishes of their superiors. Improper accounting included overstatements and booking profits early or pushing back the recording of losses or charges, and such steps often led to even higher targets being set for divisions in the following period. The report said much of the improper accounting, stretching back to fiscal year 2008, was intentional and would have been difficult for auditors to detect. The audit firm during this misstatement period was EY (Ernst & Young ShinNihon) who incurred significant reputational damage after they were accused of failing to detect the misstatement and fined $17.4 million by Japanese regulators. The investigation into Toshiba’s accounting practices was initially limited to its home country. However, in 2016 the U.S. Justice Department and the Securities and Exchange Commission began looking into the case since part of the alleged fraud involved a Toshiba unit based in the US (Westinghouse Electric Company). a. Based on this limited information, does this case represent a business failure, an audit failure, or both? b. Should auditors be held liable if their client’s business fails or if the financial statements contain a fraud that the auditors did not detect? c. Under what law would the SEC be likely to pursue this case?
FINANCIAL STATEMENTS AND TAXES Part I of this case, presented in Chapter 3, discussed the situation of D'Leon Inc., a regional snack foods producer, after an expansion program. D'Leon had increased plant capacity and undertaken a major marketing campaign in an attempt to "go national. Thus far, sales have not been up to the forecasted level, costs have been higher than were projected, and a large loss occurred in 2018 rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firm's survival. Donna Jamison was brought in as assistant to Fred Campo, D'Leon's chairman, who had the task of getting the company back into a sound financial position. D'Leon's 2017 and 2018 balance sheets and income statements, together with projections for 2019, are given in Tables IC 4.1 and 1C 4.2- In addition, Table IC 4.3 gives the company's 2017 and 2018 financial ratios, together with industry average data. The 2019 projected financial statement data represent Jamison's and Campos best guess for 2019 results, assuming that some new financing is arranged to get the company "over the hump" Jamison examined monthly data for 2018 (not given in the case), and she detected an improving pattern during the year. Monthly sales were rising, costs were falling, and large losses in the early months had turned to a small profit by December. Thus, the annual data look somewhat worse than final monthly data. Also, it appears to be taking longer for the advertising program to get the message out, for the new sales offices to generate sales, and for tire new manufacturing facilities to operate efficiently. In other words, the lags between spending money and deriving benefits were longer than D'Leon's managers had anticipated. For these reasons, Jamison and Campo see hope for the company-provided it can survive in the short run. Jamison must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken. Your assignment is to help Irer answer the following questions. Provide clear explanations, not yes or no answers. a. Why are ratios useful? What are the five major categories of ratios? b. Calculate D'Leon's 2019 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company's liquidity positions in 2017, in 2018. and as projected for 2019? We often think of ratios as being useful (1) to managers to help run the business, (2) to bankers for credit analysis, and (3) to stockholders for stock valuation. Would these different types of analysts have an equal interest in the company's liquidity ratios? Explain your answer. c. Calculate the 2019 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover. How does D'Leon's utilization of assets stack up against other firms in the industry? d. Calculate the 2019 debt-to-capital and times-interest-earned ratios. How does DLeon compare with the industry with aspect to financial leverage? What can you conclude from these rations? e. Calculate the 2019 operating margin, profit margin, basic earning power (BET), return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC) What can you say about these ratios? f. Calculate the 2019 price/earnings ratio and market /book ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company? g. Use the DuPont equation to provide a summary and overview of D'Leon's financial condition as projected for 2019. What are the firm's major strengths and weaknesses? h. Use the following simplified 2019 balance sheet to show, in general terms, how an improvement in the DSO would tend to affect the stock price. For example, if the company could improve its collection procedures a ml thereby lower its DSO from 45.6 days to the 32-day industry average without affecting sales, how would that change "ripple through" the financial statements (shown in thousands below) and influence the stock price? i. Does it appear that inventories could be adjusted? If so, how should that adjustment affect D'Leon's profitability and stock price? j. In 2018, the company paid its suppliers much later than the due dates; also, it was not maintaining financial ratios at levels called for in its bank loan agreements. Therefore, suppliers could cut the company off, and its bank could refuse to renew the loan when it comes due in 90 days. On the basis of data provided, would you, as a credit manager, continue to sell to D'Leon on credit?(You could demand cash on delivery-that is, sell on terms of COD-but that might cause D'Leon to stop buying from your company.) Similarly, if you were the bank loan officer, would you recommend renewing the loan or demanding its repayment? Would your actions be influenced if, in early 2019, D'Leon showed you its 2019 projections along with proof that it was going to raise more than 1.2 million of new equity? k. in hindsight. What should D'Leon have done in 2017? l. What are some potential problems and limitations of financial ratio analysis? m. What are some qualitative factors that analysts should consider when evaluating a company's likely future financial performance? Note E indicated estimated. The 2019 date are forecasts. a Calculated is based on a 365-day year.