Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN: 9781305970663
Author: Don R. Hansen, Maryanne M. Mowen
Publisher: Cengage Learning
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Chapter 1, Problem 4E
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 earnings 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 existing equipment, producing a reduction of
Required:
Comment on the ethical content of the earnings management being considered by the manager. Is there an ethical dilemma? What is the right choice for the manager to make? Is there any way to redesign the accounting reporting system to discourage the type of behavior the manager is contemplating?
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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…
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As president of Young's of California, a large clothing chain, you have just received a letter from a major stockholder. The stockholder asks about the company's dividend policy. In fact, the stockholder has asked you to estimate the amount of the dividend that you are likely to pay next year. You have not yet collected all the information about the expected dividend payment, but you do know the following:
(1) The company follows a residual dividend policy.
(2) The total capital budget for next year is likely to be one of three amounts, depending on the results of capital budgeting studies that are currently under way. The capital expenditure amounts are $2 million, $3 million, and $4million.
(3) The forecasted level of potential retained earnings next year is $2 million.
(4) The target or optimal capital structure is a debt ratio of 40%.
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Chapter 1 Solutions
Cornerstones of Cost Management (Cornerstones Series)
Ch. 1 - What is cost management, and how does it differ...Ch. 1 - How do cost management and financial accounting...Ch. 1 - Identify and discuss the factors that affect the...Ch. 1 - What is a flexible manufacturing system?Ch. 1 - Prob. 5DQCh. 1 - What is the difference between a line position and...Ch. 1 - The controller should be a member of the top...Ch. 1 - Prob. 8DQCh. 1 - What is the role of cost management with respect...Ch. 1 - Prob. 10DQ
Ch. 1 - What is business ethics? Is it possible to teach...Ch. 1 - Firms with higher ethical standards will...Ch. 1 - Prob. 13DQCh. 1 - Prob. 14DQCh. 1 - What are the two parts to the CMA examination?...Ch. 1 - Classify each of the following actions as either...Ch. 1 - Hepworth Communications produces cell phones. One...Ch. 1 - Prob. 3ECh. 1 - Consider the following thoughts of a manager at...Ch. 1 - Bill Christensen, the production manager, was...Ch. 1 - Each of the following scenarios requires the use...Ch. 1 - Prob. 7ECh. 1 - Lily Shultz is a junior majoring in hotel and...Ch. 1 - John Biggs and Patty Jorgenson are both cost...Ch. 1 - Emily Henson, controller of an oil exploration...Ch. 1 - Prob. 11PCh. 1 - Emery Manufacturing Company produces component...Ch. 1 - Prob. 13P
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