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The document discusses potential unethical end-of-year accounting practices, or "games", at a food company's snack division to boost reported earnings. These include improperly recognizing revenue, changing shipping dates, and advertising practices. The standards of conduct prohibit subverting objectives or withholding unfavorable information. The controller should raise concerns with division management and corporate if needed to prevent unethical reporting.

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247 views

Answers To Assignment 1

The document discusses potential unethical end-of-year accounting practices, or "games", at a food company's snack division to boost reported earnings. These include improperly recognizing revenue, changing shipping dates, and advertising practices. The standards of conduct prohibit subverting objectives or withholding unfavorable information. The controller should raise concerns with division management and corporate if needed to prevent unethical reporting.

Uploaded by

Joylyn Combong
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Exercise 5 (Professional Ethics and End-of-Year Games)

Requirement 1
The possible motivations for the snack foods division wanting to play end-of-year games include:
(a) Management incentives. Yummy Foods may have a division bonus scheme based on one-year
reported division earnings. Efforts to front-end revenue into the current year or transfer costs
into the next year can increase this bonus.
(b) Promotion opportunities and job security. Top management of Yummy Foods likely will view
those division managers that deliver high reported earnings growth rates as being the best
prospects for promotion. Division managers who deliver “unwelcome surprises” may be viewed
as less capable.
(c) Retain division autonomy. If top management of Yummy Foods adopts a “management by
exception” approach, divisions that report sharp reductions in their earnings growth rates may
attract a sizable increase in top management supervision.

Requirement 2
The “Standards of Ethical Conduct…” require management accountants to:
 Refrain from either actively or passively subverting the attainment of the organization’s
legitimate and ethical objectives, and
 Communicate unfavorable as well as favorable information and professional judgment or
opinions.

Several of the “end-of-year games” clearly are in conflict with these requirements and should be
viewed as unacceptable by Tan:
(b) The fiscal year-end should be closed on midnight of December 31. “Extending” the close falsely
reports next year’s sales as this year’s sales.
(c) Altering shipping dates is falsification of the accounting reports.
(f) Advertisements run in December should be charged to the current year. The advertising agency
is facilitating falsification of the accounting records.

The other “end-of-year games” occur in many organizations and may fall into the “gray” to
“acceptable” area. However, much depends on the circumstances surrounding each one:
(a) If the independent contractor does not do maintenance work in December, there is no
transaction regarding maintenance to record. The responsibility for ensuring that packaging
equipment is well maintained is that of the plant manager. The division controller probably can
do little more than observe the absence of a December maintenance charge.
(d) In many organizations, sales are heavily concentrated in the final weeks of the fiscal year-end. If
the double bonus is approved by the division marketing manager, the division controller can do
little more than observe the extra bonus paid in December.
(e) If TV spots are reduced in December, the advertising cost in December will be reduced. There is
no record falsification here.
(g) Much depends on the means of “persuading” carriers to accept the merchandise. For example,
if an under-the-table payment is involved, it is clearly unethical. If, however, the carrier receives
no extra consideration and willingly agrees to accept the assignment, the transaction appears
ethical.
Each of the (a), (d), (e) and (g) “end-of-year games” may well disadvantage Yummy Foods in the long
run. For example, lack of routine maintenance may lead to subsequent equipment failure. The
divisional controller is well advised to raise such issues in meetings with the division president.
However, if Yummy Foods has a rigid set of line/staff distinctions, the division president is the one
who bears primary responsibility for justifying division actions to senior corporate officers.

Requirement 3

If Tan believes that Ryan wants her to engage in unethical behavior, she should first directly raise
her concerns with Ryan. If Ryan is unwilling to change his request, Tan should discuss her concerns
with the Corporate Controller of Yummy Foods. Tan also may well ask for a transfer from the snack
foods division if she perceives Ryan is unwilling to listen to pressure brought by the Corporate
Controller, CFO, or even President of Yummy Foods. In the extreme, she may want to resign if the
corporate culture of Yummy Foods is to reward division managers who play “end-of-year games”
that Tan views as unethical and possibly illegal.

Exercise 6 (You get what you measure!)

Requirement (a)
Increase in sales to new customers to sales
Too much emphasis on this ratio may lead the sales manager to spend more time developing
business with new customers and disregard the needs of existing customers. It is therefore possible
to lose the business of several key accounts.

Requirement (b)
Decrease in cost of goods sold to sales
This performance measure could create the following problems:
1. Purchasing goods with poor quality at lower cost and selling them for the same price.
2. Indiscriminately increasing selling price to widen the profit margin without regard to
competitor’s current prices.
3. If the entity is manufacturing its own goods, managers could try to economize on costs, i.e.,
buying poorer quality of materials, employing unskilled workers, etc. thereby causing
deterioration of the quality of the finished products.

In all of the above situations, customer patronage could eventually be adversely affected.

Requirement (c)
Decrease in selling and administrative expense to sales
Cost-cutting is generally advisable for as long as the quality of goods and services are not
compromised. Likewise, certain cost-saving measures could demotivate sales people and other
employees and could lead to counter-productive activities.

Exercise 7 (The Roles of Managers and Management Accountants)


1. Managerial accounting, Financial accounting
2. Planning
3. Directing and motivating
4. Feedback
5. Decentralization
6. Line
7. Staff
8. Controller
9. Budgets
10. Performance report
11. Chief Financial Officer
12. Precision; Nonmonetary data

Answers to Multiple Choice Questions


1. B 11. D 21. A 31. B 41. B
2. B 12. C 22. C 32. B 22. A
3. A 13. D 23. D 33. A 43. A
4. A 14. B 24. B 34. C
5. B 15. D 25. C 35. D
6. C 16. B 26. B 36. C
7. B 17. C 27. A 37. C
8. D 18. B 28. B 38. C
9. B 19. A 29. C 39. A
10. C 20. A 30. D 40. B

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