EXERCISE P-4 Ethics and the Manager
Richmond, Inc., operates a chain of 44 department stores. Two years ago, the board of directors of Richmond approved a large-scale remodeling of its stores to attract a more upscale clientele.
Before finalizing these plans, two stores were remodeled as a test. Linda Perlman, assistant controller, was asked to oversee the financial reporting for these test stores, and she and other management personnel were offered bonuses based on the sales growth and profitability ofthese stores. While completing the financial reports, Perlman discovered a sizable inventory of outdated goods that should have been discounted for sale or returned to the manufacturer. She discussed the situation with her management colleagues;the consensus was to ignore reporting this inventory as obsolete because reporting it would diminish the financial results and their bonuses.
Required:
- According to the IMA’s Statement of Ethical Professional Practice, would it be ethical for Perlman not to report the inventory as obsolete?
- Would it be easy for Perlman to take the ethical action in this situation? (CMA, adapted)
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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.) 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