Horngren’s Cost Accounting A Managerial Emphasis 17th Global Edition by Srikant M. Datar solution ma

 

• Perform professional duties in accordance with relevant laws, regulations, and technical standards.
• Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
• Communicate information fairly and objectively.
• Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.

 
Several of the suggestions made by Armstrong’s staff are clearly in conflict with the statement’s principles and required standards and should be viewed as unacceptable.
a.   Pay local officials to “certify” the ramin used by CI as sustainable.  It is not certain whether the ramin would indeed be sustainable or not.  If the payment could be considered a bribe, the company would be in violation of the Foreign Corrupt Practices Act.  Knowledge of such a violation of law would be considered a violation of professional ethics.
b.   Record executive year-end bonus compensation accrued for the current year when it is paid in the next year after the December fiscal year-end. GAAP requires expenses to be recorded (accrued) when incurred, not when paid (cash basis accounting). Therefore, failure to record the executives’ year-end bonus would violate the IMA’s standards of credibility and integrity.
c.   Pressure current customers to take early delivery of goods before the end of the year so that more revenue can be reported in this year’s financial statements. This tactic, commonly known as channel stuffing, merely results in shifting future period revenues into the current period. The overstatement of revenue in the current period may mislead investors to believe that the company’s financial well-being is better than the actual results achieved. This practice would violate the IMA’s standards of credibility and integrity. Channel stuffing is frequently considered a fraudulent practice.
d.   Recognize sales revenues on orders received but not shipped as of the end of the year. GAAP requires income to be recorded (accrued) when the four criteria of revenue recognition have been met:
1.     The company has completed a significant portion of the production and sales effort.
2.     The amount of revenue can by objectively measured.
3.     The major portion of the costs has been incurred, and the remaining costs can be reasonably estimated.
4.     The eventual collection of the cash is reasonably assured.
Because criteria 1 and 3 have not been met at the time the order is placed, the revenue should not be recognized until after year-end. Therefore, recording next year’s revenue in the current year would be a violation of GAAP and would be falsifying revenue. This would be a violation of the IMA’s standards of credibility and integrity and considered fraudulent.
 
Three of the suggestions appear to be acceptable:
e.     Reject the change in materials. Counter the bad publicity with an aggressive ad campaign showing the consumer products as “made in the USA,” since manufacturing takes place in North Carolina. This is an acceptable strategy. Consumers could then weigh the employment benefits in the United States against the negative environmental effects of the company’s actions.
f.     Redesign upholstered furniture to replace ramin contained inside with less expensive recycled plastic.  Creative changes in product design using recycled materials will allow CI to address sustainability concerns as well as protect company profits.
g.     Begin purchasing sustainable North American hardwoods and sell the Indonesian lumber subsidiary.  Initiate a “plant a tree” marketing program, by which the company will plant a tree for every piece of furniture sold.  While this solution would increase cost of materials and the price CI must charge for its product, sales and profits may not decline if consumers perceive the value of sustainability and corporate social responsibility.
 
The other “year-end” actions occur in many organizations and fall into the “gray” to “acceptable” area. Much depends on the circumstances surrounding each one, however, such as the following:
h.   Make deep cuts in pricing through the end of the year to generate additional revenue.