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Chapter 24: Q11CA_a (page 1457)

(Disclosure of Estimates) Nancy Tercek, the financial vice president, and Margaret Lilly, the controller, of Romine Manufacturing Company are reviewing the financial ratios of the company for the years 2017 and 2018. The financial vice president notes that the profit margin on sales ratio has increased from 6% to 12%, a hefty gain for the 2-year period. Tercek is in the process of issuing a media release that emphasizes the efficiency of Romine Manufacturing in controlling cost. Margaret Lilly knows that the difference in ratios is due primarily to an earlier company decision to reduce the estimates of warranty and bad debt expense for 2018. The controller, not sure of her supervisor鈥檚 motives, hesitates to suggest to Tercek that the company鈥檚 improvement is unrelated to efficiency in controlling cost. To complicate matters, the media release is scheduled in a few days.

Instructions

  1. What, if any, is the ethical dilemma in this situation?

Short Answer

Expert verified

The Financial vice president is manipulating the company鈥檚 financial condition.

Step by step solution

01

Meaning of Ethical Dilemma

An ethical dilemma arises when two sets of human ideals are conflicting, both of which are desirable but cannot be fully realized. There is no such thing as a one-size-fits-all ethical solution; instead, many approaches address the balance of values in different ways for different people.

02

Explaining the ethical dilemma in the above situation

The controller points out that the financial vice president is misrepresenting the company's financial situation by implying that it had grown more efficient when, in reality, the better ratio was achieved by estimate manipulation. The controller, on the other hand, is hesitant since estimating does not follow strict, well-defined criteria.

The problem arises when Lilly is required to evaluate the benefits to the firm if its profit margin on sales looks to be substantially higher against the accountant's typical responsibility to disclose financial data properly (that is, in a manner that is consistent with the previous reporting).

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Most popular questions from this chapter

Morlan Corporation is preparing its December 31, 2017, financial statements. Two events that occurred between December 31, 2017, and March 10, 2018, when the statements were authorized for issue, are described below.

  1. A liability, estimated at \(160,000 at December 31, 2017, was settled on February 26, 2018, at \)170,000.
  2. A flood loss of $80,000 occurred on March 1, 2018.

Instructions

What effect do these subsequent events have on 2017 net income?

Tina Bailey, a student of intermediate accounting, was heard to remark after a class discussion on segment reporting, 鈥淎ll this is very confusing to me. First we are told that there is merit in presenting the consolidated results, and now we are told that it is better to show segmental results. I wish they would make up their minds.鈥� Evaluate this comment.

Edna Millay Inc. is a manufacturer of electronic components and accessories with total assets of $20,000,000. Selected financial ratios for Millay and the industry averages for firms of similar size are presented below.

Edna Millay

2017 Industry

2015

2016

2017

Averages

Current ratio

2.09

2.27

2.51

2.24

Quick ratio

1.15

1.12

1.19

1.22

Inventory turnover

2.40

2.18

2.02

3.50

Net sales to stockholders鈥� equity

2.71

2.80

2.99

2.85

Return on common stockholders鈥� equity

0.14

0.15

0.17

0.11

Total liabilities to stockholders鈥� equity

1.41

1.37

1.44

0.95

Millay is being reviewed by several entities whose interests vary, and the company鈥檚 financial ratios are a part of the data being considered. Each of the parties listed below must recommend an action based on its evaluation of Millay鈥檚 financial position.

Archibald MacLeish Bank. The bank is processing Millay鈥檚 application for a new 5-year term note. Archibald MacLeish has been Millay鈥檚 banker for several years but must reevaluate the company鈥檚 financial position for each major transaction.

Robert Penn Warren. A brokerage firm specializing in the stock of electronics firms that are sold over-the-counter, Robert Penn Warren must decide if it will include Millay in a new fund being established for sale to Robert Penn Warren鈥檚 clients.

Working Capital Management Committee. This is a committee of Millay鈥檚 management personnel chaired by the chief operating officer. The committee is charged with the responsibility of periodically reviewing the company鈥檚 working capital position, comparing actual data against budgets, and recommending changes in strategy as needed.

Instructions

a) Describe the analytical use of each of the six ratios presented above.

Snider Corporation, a publicly-traded company, is preparing the interim financial data which it will issue to its shareholders at the end of the first quarter of the 2017鈥�2018 fiscal year. Snider鈥檚 financial accounting department has compiled the following summarized revenue and expense data for the first quarter of the year.

Sales revenue \(60,000,000

Cost of goods sold 36,000,000

Variable selling expenses 1,000,000

Fixed selling expenses 3,000,000

Included in the fixed selling expenses was the single lump-sum payment of \)2,000,000 for television advertisements for the entire year.

Instructions

a) Snider Corporation must issue its quarterly financial statements in accordance with IFRS regarding interim financial reporting.

2. State how the sales revenue, cost of goods sold, and fixed selling expenses would be reflected in Snider Corporation鈥檚 quarterly report prepared for the first quarter of the 2017鈥�2018 fiscal year. Briefly y justify your presentation.

What is a performance obligation, and how is it used to determine when revenue should be recognized?
See all solutions

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