Horngren’s Cost Accounting A Managerial Emphasis 17th Global Edition by Srikant M. Datar solution ma
Again, this is only a short-term tactic to improve this year’s financial results. Investors may be content in the short run, but in the long run, the company may see reduced margins from these actions.
i. Sell-off production equipment prior to year-end. The sale would result in one-time gains that could offset the company’s lagging profits. The owned equipment could be replaced with leased equipment at a lower cost in the current year. While this course of action does not necessarily violate the IMA’s code of ethical standards, it may be only a short-term tactic to improve this year’s financial results. Armstrong will need to weigh his options in the long term to make the most cost-effective decision for his company.
2. It is possible that any of the “year-end” actions that fall into the “gray” area may be good for investors, depending on the credible evidence that supports the management decision. For example, replacing owned equipment with leased equipment may result in both short-term gains for the company and long-term cost reduction. If so, this decision would be in the best interest of the investors. If the decision only results in short-term gains, but higher costs in the long run, then the decision may not be in the best long-term interest of the company’s investors and should not be implemented solely to prop up short-term earnings.
Those decisions that clearly violate the IMA code of ethical standards (a, c, f, and i) would never be in the best interest of the investor. These options would result in misleading financial statements and could result in the demise of the company or even in criminal charges, as was the case with companies such as Enron and WorldCom. If Armstrong asks the management accountant to take any of the actions that are clearly unethical, he should raise this issue with the chair of the Audit Committee after informing Armstrong that he is doing so. If Armstrong still insists on the management accountant taking these actions, he should resign rather than engage in unethical behavior.
i. Sell-off production equipment prior to year-end. The sale would result in one-time gains that could offset the company’s lagging profits. The owned equipment could be replaced with leased equipment at a lower cost in the current year. While this course of action does not necessarily violate the IMA’s code of ethical standards, it may be only a short-term tactic to improve this year’s financial results. Armstrong will need to weigh his options in the long term to make the most cost-effective decision for his company.
2. It is possible that any of the “year-end” actions that fall into the “gray” area may be good for investors, depending on the credible evidence that supports the management decision. For example, replacing owned equipment with leased equipment may result in both short-term gains for the company and long-term cost reduction. If so, this decision would be in the best interest of the investors. If the decision only results in short-term gains, but higher costs in the long run, then the decision may not be in the best long-term interest of the company’s investors and should not be implemented solely to prop up short-term earnings.
Those decisions that clearly violate the IMA code of ethical standards (a, c, f, and i) would never be in the best interest of the investor. These options would result in misleading financial statements and could result in the demise of the company or even in criminal charges, as was the case with companies such as Enron and WorldCom. If Armstrong asks the management accountant to take any of the actions that are clearly unethical, he should raise this issue with the chair of the Audit Committee after informing Armstrong that he is doing so. If Armstrong still insists on the management accountant taking these actions, he should resign rather than engage in unethical behavior.